Debt Retirement Principles

Question 1

How is the retirement of debt at maturity treated?

Answer 1

Any discount or premium and debt issues costs are fully amortized. No gain or loss is recognized.

Question 2

Where are most gains and losses on debt retirement included?

Answer 2

In income from continuing operations

Question 3

When interest rates have increased since debt was issued, is there a gain or loss on the early retirement of debt?

Answer 3

This would mean the market price of the debt security decreases (Interest rates and debt prices are inversely related). The price the firm will have to pay to retire thus declines below Book value. A gain will be recognized.

Question 4

What is the two condition test to see if debt is considered extinguished? one of two must be met

Answer 4

1. ) The debtor pays the creditor and is relieved of any obligation related to the debt
2. ) The debtor is legally released from being the primary obligor of the liability. This legal release may be done by the creditor or the courts.

Question 5

What happens if a debtor firm places assets into an irrevocable trust for the purpose of retiring debt?

Answer 5

The liability still remains on the balance sheet. The assets will be separately reported. The liability is not extinguished nor is a gain or loss recorded.

Question 6

List the steps to retire debt on the books

Answer 6

1. ) Record interest, amortization of discount/premium, issue costs to date of retirement;;
2. ) Remove debt and related accounts;
3. ) Record gain or loss

Question 7

When will there be a gain on the early extinguishment of debt?

Answer 7

Gain=debt book value - unamortized debt issue costs - cash paid

Question 8

Where are gains and losses from early extinguishment of debt reported on the financials under IFRS?

Answer 8

in “Other Income” the same category as interest expense.

Question 9

What are some of the common terms in extinguishment of debt?

Answer 9

Bonds Payable (Face of bonds retired)
Premium (unamortized portion)
Bond issue costs (Unamortized portion)
Discount (Unamortized portion)
Cash (Market price)
Gain (Plug)