At January 1, 2017, Sutton Inc. owes Patton Bank $10 million under an 8% note with two years remaining to maturity, with interest payments due at the end of the year. Due to financial difficulties faced by Sutton Inc., the company could not pay the previous years interest.

Scenario 1

Patton agrees to settle the total amount owed by Sutton in exchange for an office building with a fair value of $9,275,000 and a net book value of $9,750,000 (with an accumulated depreciation of $5,750,000 and an the original salvage value of $175,000). Mr. John The GAAP Guy, the CFO of Sutton Inc., is worried that this transaction does not fall under the accounting standard for troubled debt restructuring as the debt is fully settled.

Assuming Sutton is a publicly-traded company, would you expect its stock price to go up after the company releases its financial statements reporting a gain on troubled debt restructuring? Explain.