Ch 14.2 (Extinguishment of Debt)

Question 1

Extinguishment of Debt

Answer 1

Recording the payment of debt.

If a company holds the bonds (or any other form of debt security) to maturity, the company does not compute any gains or losses. It will have fully amortized any premium or discount at the date the bonds mature.

Question 2

Reacquisition Price

Answer 2

The amount paid on extinguishment or redemption before maturity, including any call premium and expense of reacquisition.

At the time of reacquisition, the unamortized premium or discount, and any costs of issue applicable to the bonds, must be amortized up to the reacquisition date.

Question 3

Gain from extinguishment

Answer 3

Any excess of the net carrying amount over the reacquisition price.

Question 4

Loss from extinguishment

Answer 4

Excess of the reacquisition price over the net carrying amount.

Question 5

Net Carrying Amount

Answer 5

On any specified date, the net carrying amount of the bonds is the amount payable at maturity, adjusted for unamortized premium or discount.

Question 6

Refunding

Answer 6

Replacement of an existing issuance with a new one

Question 7

Debt and Equity

Answer 7

Too much debt can start affecting equity. In other words, having too much debt can affect the shareholder price because the company is not able to keep up with their debt and dividends.