Question

In: Accounting

Headquartered in Montreal, Canada, Valeant Pharmaceuticals International is a multinational company that develops and markets prescription...

Headquartered in Montreal, Canada, Valeant Pharmaceuticals International is a multinational company that develops and markets prescription and non-prescription products in dermatology and neurology. The company is listed both on the NYSE and Toronto Stock Exchange. Its 2015 Income Statement reported the following line item.

$Millions 2015 2014 2013

Loss of Extinguishment debt------------------ $20.0 $129.6 $65.0

a) What is a ‘Loss of extinguishment of debt’? When does such a loss occur?

b) How is this loss calculated?

c) How does this loss impact the financial statements?

d) Why might management want to retire this debt early, even if it was at a loss?

Solutions

Expert Solution

1. First of all, extinguishment of debt refers to writing off debt from the financial statements. Debt needs to be written off in case of early payment of debt or prepayment of debt.

Therefore loss on extinguishment on debt arise when there is prepayment of debt.

2. Calculation of loss on extinguishment of debt,

It is calculated as follows:

Fair value of payments made - Carrying Amount of debt

Fair value refers to the discounted value of the payments to be made at the time of extinguishment

Carrying value refers to the amount at which the debt appears in the books of accounts on the date of extinguishment.

3. Impact on financial statements:

It is an expense of a financial nature and is recorded in the financial statements as borrowing cost. Hence, it reduces the profit for the period in which it is recorded.

4. Why management may want to retire the debt early even if it was at a loss:

There may be several reason of why management may want to retire this debt early even if it was at a loss:

a) The main reason can be if the management had excess cash surplus then what was required. It can use the excess for prepayment of debt to reduce the interest cost.

b) Another reason can be that if funds are available at a cheaper rate than what the management is using. For eg Management's current cost of debt is 6% and the funds are now available at a rate of 5%. Now management may want to retire the debt bearing interest rate of 6% and borrow at 5%.

c) If management had some capital receipts in the year. It may instead of investing in fixed assets decide to repay the debt early to reduce the interest cost.


Related Solutions

WD Imagine Inc. has three locations in Canada: Vancouver, Toronto and Montreal. The company develops and...
WD Imagine Inc. has three locations in Canada: Vancouver, Toronto and Montreal. The company develops and maintains web-designs for medium size companies. Management of Vancouver office is concerned about the cost of handling web-related matters. WD Imagine Vancouver Office has provided the following data for the year 2019: Junior web-designers salaries          $ 280,000 Senior web-designers salaries            $ 320,000 Office manager salary                        $ 120,000 WD accountant believes that apart from salaries all other expenses are fixed costs and cannot...
WD Imagine Inc. has three locations in Canada: Vancouver, Toronto and Montreal. The company develops and...
WD Imagine Inc. has three locations in Canada: Vancouver, Toronto and Montreal. The company develops and maintains web-designs for medium size companies. Management of Vancouver office is concerned about the cost of handling web-related matters. WD Imagine Vancouver Office has provided the following data for the year 2019: Junior web-designers salaries          $ 280,000 Senior web-designers salaries            $ 320,000 Office manager salary                        $ 120,000 WD accountant believes that apart from salaries all other expenses are fixed costs and cannot...
WD Imagine Inc. has three locations in Canada: Vancouver, Toronto and Montreal. The company develops and...
WD Imagine Inc. has three locations in Canada: Vancouver, Toronto and Montreal. The company develops and maintains web-designs for medium size companies. Management of Vancouver office is concerned about the cost of handling web-related matters. WD Imagine Vancouver Office has provided the following data for the year 2019: Junior web-designers salaries          $ 280,000 Senior web-designers salaries            $ 320,000 Office manager salary                        $ 120,000 WD accountant believes that apart from salaries all other expenses are fixed costs and cannot...
Carillion plc was a British multinational construction and facilities management services company headquartered in Wolverhampton in...
Carillion plc was a British multinational construction and facilities management services company headquartered in Wolverhampton in the United Kingdom, prior to its liquidation officially, "the largest ever trading liquidation in the UK" - which began in January 2018. Later, in a June 2018 report on audit standards across eight accounting firms in the UK, the FRC (Financial reporting Council)- the regulatory agency of the auditing profession in the UK identified: "failure to challenge management and show appropriate skepticism across their...
Motorola Mobility LLC is a company that develops mobile devices. Headquartered in Chicago, Illinois, United States,...
Motorola Mobility LLC is a company that develops mobile devices. Headquartered in Chicago, Illinois, United States, the company was formed on January 4, 2011 by the split of Motorola Inc. into two separate companies; Motorola Mobility took on the company's consumer-oriented product lines, including its mobile phone business and its cable modems and set-top boxes for digital cable and satellite television services, while Motorola Solutions retained the company's enterprise-oriented product lines. Early 2012, Google decided to purchase Motorola mobility LLC...
Motorola Mobility LLC is a company that develops mobile devices. Headquartered in Chicago, Illinois, United States,...
Motorola Mobility LLC is a company that develops mobile devices. Headquartered in Chicago, Illinois, United States, the company was formed on January 4, 2011 by the split of Motorola Inc. into two separate companies; Motorola Mobility took on the company's consumer-oriented product lines, including its mobile phone business and its cable modems and set-top boxes for digital cable and satellite television services, while Motorola Solutions retained the company's enterprise-oriented product lines. Early 2012, Google decided to purchase Motorola mobility LLC...
Motorola Mobility LLC is a company that develops mobile devices. Headquartered in Chicago, Illinois, United States,...
Motorola Mobility LLC is a company that develops mobile devices. Headquartered in Chicago, Illinois, United States, the company was formed on January 4, 2011 by the split of Motorola Inc. into two separate companies; Motorola Mobility took on the company's consumer-oriented product lines, including its mobile phone business and its cable modems and set-top boxes for digital cable and satellite television services, while Motorola Solutions retained the company's enterprise-oriented product lines. Early 2012, Google decided to purchase Motorola mobility LLC...
Sinclair​ Pharmaceuticals, a small drug​ company, develops a vaccine that will protect against Helicobacter pylori​,a bacteria...
Sinclair​ Pharmaceuticals, a small drug​ company, develops a vaccine that will protect against Helicobacter pylori​,a bacteria that is the cause of a number of diseases of the stomach. It is expected that Sinclair Pharmaceuticals will experience extremely high growth over the next three years and will reinvest all of its earnings in expanding the company over this time. Earnings were $ 1.25 per share before the development of the vaccine and are expected to grow by​ 40% per year for...
W is an American multinational computer technology company based in Tampa, Florida, United States, that develops,...
W is an American multinational computer technology company based in Tampa, Florida, United States, that develops, sells, repairs, and supports computers and related products and services. Named after its founder, Michael Wahoo, the company is one of the largest technological corporations in the world, employing more than 103,300 people in the U.S. and around the world. Wahoo sells personal computers (PCs), servers, data storage devices, network switches, software, computer peripherals, HDTVs, cameras, printers, MP3 players, and electronics built by other...
WHO WILL STAFF UP THE CHINA OPERATIONS? Your international company headquartered in New Jersey is sending...
WHO WILL STAFF UP THE CHINA OPERATIONS? Your international company headquartered in New Jersey is sending an expatriate to China for a three-year assignment to staff up and run a new branch of its industrial products business. The main Chinese customers are using the products in their Middle Eastern and North African petroleum operations. You have extensive overseas experience and presently serve as VP, Human Resources. You chair the selection committee. There were 12 internal people interested in the position,...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT