If bank loan is revalued and its amount is reduced what type of effect is it?

Correct answer: Gain

Direct answer: The reduction in a bank loan is a gain, so option A is correct. A bank loan is a liability because the firm owes money to the bank. When a liability is reduced, the firm’s obligation becomes smaller. This increases net worth and is treated as a gain on revaluation. The reduction is credited to the Revaluation Account; the loan account is reduced by the same amount. Option A is therefore correct. Option B is wrong because an increase in a liability would create a loss, but the question says the loan is reduced. Option C is wrong because the bank loan is not an asset; it is a liability. Option D, drawings, concerns money withdrawn by a partner and has no connection with a liability adjustment. The exact amount of gain would be the old loan minus its revised amount. Memory cue: liability down means gain and Revaluation Account credit.