Wall Ltd and Door Ltd enter separate contracts to pay cash of \(\$ 100000\) to Bedroom Ltd in 5 years' time. Wall Ltd has a AA credit rating and can borrow at \(4 \%\). Door Ltd has a BBB credit rating and can borrow at \(10 \%\). At initial recognition, the fair value of the liability of each entity must reflect the credit standing of that entity.

Required 1. Determine the fair values of the contractual obligations of Wall Ltd and Door Ltd to Bedroom Ltd on initial recognition.

2. Assume Wall Ltd's credit rating decreases to AA- by the end of the first year and its borrowing rate changes to \(6 \%\), while Door Ltd's credit rating improves to BB and its borrowing rate changes to \(8 \%\). Determine the fair value measurements of the contractual obligations after based on the new credit ratings. Does a decline in credit rating give rise to a gain or loss when measurement is at fair value?