Extinguishing Debt

If a company repays debt at maturity, the amount of debt is removed as a liability on the balance sheet and is shown as a financing cash outflow. But what happens when a company extinguishes debt early, either by repurchasing the bonds on the open market or by calling the bonds?

First, the company must record a gain or loss on the income statement that represents the difference between the price paid for the bonds and their book value at the time of purchase. The gain or loss would also include any remaining debt issuance costs that were being amortized over the life of the bond. When the gain or loss is material, it is shown as a separate line item on the income statement.

On the balance sheet, the book value of the debt is eliminated from liabilities, and the gain or loss is reflected in shareholder equity through retained earnings.

On the statement of cash flows, the gain or loss is removed from operating activities (if the indirect method is being used) and added to financing activities.

For more information, see all articles on: Accounting, Financial Statement Analysis, Fixed income investments, Fundamental Analysis, Investing in bonds, Valuation

See also:
  • Current Portion of Debt, or Debt Maturing Within One Year
  • Accounting for Debt Retirement
  • Debt to Equity
  • Analyzing Convertible Debt
  • Restructured or Impaired Debt
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