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3. The generally accepted method of accounting for gains or losses from the early extinguishment of debt treats any gain or l
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Answer #1

Hello,

A) WRONG. Gain/loss from early extinguishment of debt cannot be adjusted to the cost basis of any asset, as this should be disclosed separately in the Income Statement.

B) WRONG. This can be a non-cash transaction also, for example instead of paying off cash during extinguishment the company offers the bond holders stock. Hence this cannot be treated as a cash adjustment to the cost of the new debt issued.

C) WRONG. This should not be amortized over the life of the new asset, instead recognize the full gain/loss in the income in the year of redemption itself.

D) CORRECT. As per GAAP, the gain/loss from early extinguishment of debt, if material, should be recognized in the period of redemption. The gain/loss will be the difference between the reacquisition price and the net carrying amount of the debt.

Thanks!

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