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Subject 3. Derecognition of Debt PDF Download
Early retirements of debt may occur because a company has generated sufficient cash reserves from operations and wants to stop paying interest on outstanding debt. Or interest rates may have changed, and the company wants to take advantage of more favorable borrowing opportunities; you have probably heard of individuals engaging in this type of strategy when they "refinance" a home loan.

Whether debt is being retired or refinanced in some other way, accounting rules dictate that the retired debt be removed from the books and the difference between the debt's net carrying value and the funds paid to retire the debt be recognized as a gain or loss.


Assume that Cabano Corporation is retiring $200,000 face value of its 6% bonds payable. The last semi-annual interest payment occurred on April 30 and the bonds are being retired on June 30, 2010. The unamortized discount on the bonds on April 30, 2010, was $6,000, and there was a 5-year remaining life on the bonds as of that date. Further, Cabano is paying $210,000, plus accrued interest, to retire the bonds; this "early call" price was stipulated in the original bond covenant.

The first step to account for this bond retirement is to bring the accounting for interest up to date:

Interest Expense (debit): 2,200
Discount on Bonds Payable (credit): 200
Interest Payable (credit): 2,000

Then, the actual bond retirement can be recorded, with the difference between the up-to-date carrying value and the funds utilized recorded as a loss (debit) or gain (credit).

Bonds Payable (debit): 200,000
Interest Payable (debit): 2,000
Loss on Bond Retirement (debit): 15,800
Discount on Bonds Payable (credit): 5,800
Cash (credit): 212,000

Notice that Cabano's loss relates to the fact that it took a lot more cash ($210,000) to pay off the debt than was the debt's carrying value ($200,000 - $5,800 = $194,200).

User Contributed Comments 8

User Comment
Emily1119 Don't know calculation
moneyguy Some more explanation for these equation solutions would be nice here.
nab3a123 Yeah I don't get it
CHUCKYT To figure the loss or gain on the debt retirement you have to get the current carrying value. 2 months have not been accounted for. 2 months of interest payable(200000x.06)/6=2000
2 months of amortization on the discount (6000/60)x2=200. Current carrying value 6000-200=5800.
CHUCKYT Current carrying value is actually 200000-5800=194200.
5800 is the (unamortized) net discount value that is remaining at retirement.
sdm1981 Chuckyt, please break this down furthe
juicyton So this uses the straight line method instead of effective interest rate?
PeterHaber @juicyton correct, @chuckyt it's 6,000 to be amortized along 5 years of 12 months, thus, 60 periods. This is for two months, so (6000/60)*2=200 a discount that will go to the books as a non-cash expense so it's substracted from the interest expense recorded (which is Coupon of 2,000 + discount to be amortized of the stated period 200).

Hope it helped, blessings
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I passed! I did not get a chance to tell you before the exam - but your site was excellent. I will definitely take it next year for Level II.
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