In short
Debt is extinguished when it is repaid or the debtor is legally released from it. On early extinguishment, the difference between the amount paid and the debt's net carrying amount is recognized as a gain or loss in income.
Key takeaways
- Net carrying amount is face value plus unamortized premium, or minus unamortized discount and issuance costs.
- Buying back bonds for less than their carrying amount produces a gain.
- Buying an affiliate's bonds from outsiders is treated as a constructive retirement in consolidation.
Example
Bonds with a face value of $500,000 and a $15,000 unamortized discount are retired for $510,000: a $25,000 loss.
Where it's tested
FAR: Long-Term Debt (Bonds & Notes) — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
Bonds with a face amount of $1,000,000 and a carrying value of $980,000 are retired early at 102. What gain or loss is recognized?