CASE 11‐5 Early Extinguishment of Debt Gains or losses from the early extinguishment of debt that...

CASE 11‐5 Early Extinguishment of Debt

Gains or losses from the early extinguishment of debt that is refunded can theoretically be accounted for in three ways:

Amortized over the life of old debt
Amortized over the life of the new debt issue
Recognized in the period of extinguishment

Required:

Discuss the supporting arguments for each of the three theoretical methods of accounting for gains and losses from the early extinguishment of debt.
Which of the three methods would provide a balance sheet measure that reflects the present value of the future cash flows discounted at the interest rate that is commensurate with the risk associated with the new debt issue? Why?
Which of the three methods is generally accepted, and how should the appropriate amount of gain or loss be shown in a company’s financial statements?

Expert Solution

Early extinguishment of debt refers to recall the debt securities issued by the organisation before maturity of debt in order to save further finance cost or gain advantage of favourable market conditions. Sometimes, this is also happened when the interest rate is down in the market and we have already issued the debt security at higher rate of interest. In that case it is suitable to recall them and issue fresh security at lower interest rate to save finance cost.

This extinguishment of debt may be possible either in gain or loss to organisation but ultimately it will give benefit to the organisation in future year by saving finance cost.

As per accounting framework provided by Financial Accounting Standard Board (FASB) and International Accounting Standard Board (IASB), it is recommended that all the gains including the losses will be recorded in the year of extinguishment. Here, gain (loss) refers to difference between reacquisition value of debt security and net carrying value (Face Value after adjusting unamortized premium (Discount) and Cost of Issue of Security).

However, if there is any change and modification in terms of debt security then it will also treated as debt extinguishment if the present value of future cash flow of new security is varied by at least 10% from the present value of cash flow of original security.

ekkarill92 answered 2 years ago

Sara had the following Section 1231 gains and losses for the preceding 5 years Year Gains...

Sara had the following Section 1231 gains and losses for the preceding 5 years Year Gains Losses 2104 15,000 7,000 2015 3,000 35,000 2016 10,000 0 2017 4,000 2,000 2018 35,000 8,000 For 2018 Sarah should report the income and the character of that income on her 2018 tax return A. Ordinary gain in the amount of $27,000. B. Capital gain in the amount of $27,000. C. Ordinary loss and capital gain in the amounts of $8,000 and $35,000, respectively....

Thoroughly explain.. How specifically, do gains and losses resulting from fair value adjustments to debt affect...

Thoroughly explain.. How specifically, do gains and losses resulting from fair value adjustments to debt affect the financial statements? What opportunities do you see for manipulation of the financial reporting of debt? Do you see any ethical issues with regard to fair value accounting?

Explain Capital gains and losses versus ordinary gains and losses what's your understanding?

__________ is an investor's uncertainty about the economic gains or losses that will result from a...

__________ is an investor's uncertainty about the economic gains or losses that will result from a particular investment. Select one: a. Risk b. Revenue c. Return d. Reward Question 2 Not yet answered Points out of 1.00 Flag question Question text A key purpose of a vision and mission statement is to inform _________ what a firm is, what it seeks to accomplish, and who it seeks to serve. Select one: a. former employees b. regulators c. CEOs d. stakeholders...

Discuss gains/losses on sale of equipment in view of investors’ assessment of these gains/losses (i.e., economic...

Discuss gains/losses on sale of equipment in view of investors’ assessment of these gains/losses (i.e., economic gains/losses) in relation with previous depreciation expenses of the equipment

Bill had the following gains and losses on asset sales: $500 gain on stock held 11...

Bill had the following gains and losses on asset sales: $500 gain on stock held 11 months; a $2,300 gain on land held two years; $1,900 loss on gold coins held two years; $1,200 gain on antique toys held three years; and a $1,300 loss on investment land held six months. Determine Bill’s (A) net capital gain or loss, (B) the capital gains rate that applies to each asset sale, (C) the capital gain rate(s) that would apply to the...

1. If a taxpayer has gains and losses from an activity, are they better off classifying...

1. If a taxpayer has gains and losses from an activity, are they better off classifying the activity as a hobby or as a business? Explain why. Mr. D works full-time as a systems analyst for a consulting firm. In addition, he sells plants that he raises himself in a greenhouse attached to his residence. During the past 5 years, the results from raising and selling the plants have been as follows: Year Net Profit (Loss) from Scenario 1: Scenario...

Problem 15-3A Debt investments in available-for-sale securities; unrealized and realized gains and losses LO P3 [The...

Problem 15-3A Debt investments in available-for-sale securities; unrealized and realized gains and losses LO P3 [The following information applies to the questions displayed below.] Stoll Co.'s long-term available-for-sale portfolio at the start of this year consists of the following. Available-for-Sale Securities Cost Fair Value Company A bonds $ 533,600 $ 490,000 Company B notes 159,230 152,000 Company C bonds 662,000 640,190 Stoll enters into the following transactions involving its available-for-sale debt securities this year. Jan. 29 Sold one-half of the...

Why are there usually redistributive gains and losses from trade opening? Give examples. If the United...

Why are there usually redistributive gains and losses from trade opening? Give examples. If the United States exports high-skilled labor goods and China exports low-skilled labor goods, how is this pattern of trade affecting inequality in the distribution of income in each of the two countries?  

In Example 9.1 LOADING... , we calculated the gains and losses from price controls on natural...

In Example 9.1 LOADING... , we calculated the gains and losses from price controls on natural gas and found that there was a deadweight loss of $5.68 billion. This calculation was based on a price of oil of $50 per barrel and utilized the following equations: Supply: QS = 15.90 + 0.72PG + 0.05PO Demand: QD = 0.02minus−1.8PG + 0.69PO where QS and QD are the quantities supplied and demanded, each measured in trillion cubic feet (Tcf), PG is the...

Question