Lesson21

Question 1

Define extinguishment of debt

Answer 1

the payment of debt

Question 2

What is the reacquisition price

Answer 2

the amount paid on extinguishment before maturity, including any call premium and expense of reacquisition

Question 3

Any excess of the net carrying amount over the reacquisition price is what

Answer 3

a gain from extinguishment

Question 4

The excess of the reacquisition price over the net carrying amount is what

Answer 4

a loss from extinguishment

Question 5

at the time of reacquisition, what must be done to the unamortized premium or discount and any costs of issue applicable to the bonds

Answer 5

they must be amortized up to the reacquisition date

Question 6

Define refunding

Answer 6

the replacement of an existing issuance with a new one

Question 7

On June 30, 2017, Baker Co. had outstanding 8%, $6,000,000 face amount, 15-year bonds maturing on June 30, 2027. Interest is payable on June 30 and December 31. The unamortized balance in the bond discount account on June 30, 2017 was $210,000. On June 30, 2017, Baker acquired all of these bonds at 94 and retired them.

What net carrying amount should be used in computing gain or loss on this early extinguishment of debt?

Answer 7

5,790000

The net carrying value of a bond used to calculate a gain or loss on the redemption of the bond is the face value less any unamortized discount. The face value of the bond is $6,000,000 and the unamortized discount is $210,000. Therefore the book value is $5,790,000 ($6,000,000 - $210,000).

Question 8

What is the generally accepted method of accounting for gains or losses from the early extinguishment of debt?

Answer 8

A difference between the reacquisition price and the net carrying amount of the debt which should be recognized in the period of redemption

Any excess of the net carrying amount over the reacquisition price is a gain from extinguishment. The excess of the reacquisition price over the net carrying amount is a loss from extinguishment. These gains or losses are reported in the period of redemption.

Question 9

Kant Corporation retires its $500,000 face value bonds at 102 on January 1, following the payment of interest. The carrying value of the bonds at the redemption date is $481,250.

What does the entry to record the redemption include?

Answer 9

Credit of $18,750 to Discount on Bonds Payable

The unamortized discount is $18,750 ($500,000 - $481,250). In order to zero out the bond on redemption, the debit balance of $18,750 must be cleared by recording a credit to the account.