Member of Group:
- Douglas Arthur Philippines Togatorop (C1I021001)
- Mawar Sylvia Hanifah (C1I022002)
- Ifandha Nadiffany Firdaus (C1I022006)
- Alivia Nur Salsabila (C1I022009)
- Alda Rismayana (C1I022016)
- Oktavia Stefany (C1I022017)
- Michelle Margaretha Lumbanraja (C1I022023)
Q16. Identify the situations under which debt is extinguished.
Answer:
Debt can be extinguished under various circumstances, including:
● Full Repayment: When the borrower repays the entire principal and interest
according to the agreed terms.
● Debt Forgiveness: In some cases, creditors may forgive a portion or the entirety of a
debt, often due to financial hardship or special arrangements.
● Bankruptcy: Debt can be discharged through bankruptcy proceedings, providing relief
to individuals or businesses facing insurmountable financial challenges.
● Debt Settlement: Negotiating with creditors to accept a reduced amount as full
satisfaction of the debt can lead to extinguishment.
● Expiration of Statute of Limitations: Debt may be extinguished if the statute of
limitations expires, preventing legal action for recovery.
● Death of the Debtor: In some cases, debts may be discharged upon the death of the
debtor, depending on the jurisdiction and the nature of the debt.
Always consult with financial professionals or legal advisors for guidance tailored to your
specific situation.
Q17. What is the “call” feature of a bond issue? How does the call feature affect the
amortization of bond premium or discount?
Answer:
The "call" feature of a bond allows the issuer to redeem or retire the bonds before their
maturity date. When bonds are called, bondholders receive the face value of the bonds plus
any call premium specified in the bond agreement.
The call feature can impact the amortization of bond premium or discount. If bonds are
called at a premium, the issuer may need to pay a premium over the face value. This can
result in a loss for bondholders who purchased the bonds at a premium, and the
unamortized premium is typically expensed at the time of the call. On the other hand, if
bonds are called at a discount, bondholders may incur a gain, and any unamortized discount
is usually amortized until the call date.
In summary, the call feature affects the amortization of bond premium or discount by
triggering adjustments when bonds are called before maturity.
Q18. Why would a company wish to reduce its bond indebtedness before its bonds
reach maturity? Indicate how this can be done and the correct accounting treatment
for such a transaction.
Answer:
A company may wish to reduce its bond indebtedness before maturity to lower interest
costs, improve financial flexibility, or enhance its credit rating. This can be achieved through
early redemption, repurchasing bonds in the open market, or exchanging them for equity.
The correct accounting treatment depends on the method used. For early redemption or
repurchasing, any gain or loss is recognized in the income statement, and the bond liability
is reduced by the cash paid. If exchanging for equity, the bonds are retired and equity is
increased by the fair value of the equity issued.
Q19. What are the general rules for measuring a gain or a loss by a debtor in a debt
extinguishment?
Answer:
The gain or loss on debt extinguishment is generally calculated as the difference between
the reacquisition cost of the debt (amount paid to extinguish) and the net carrying amount of
the debt being extinguished. Here are the general rules.
● Gain/Loss Calculation:
○ Gain: If the reacquisition cost is less than the net carrying amount, the
difference is recognized as a gain.
○ Loss: If the reacquisition cost exceeds the net carrying amount, the difference
is recognized as a loss.
● Net Carrying Amount: The net carrying amount includes the book value of the debt
(original principal minus any unamortized discount or plus any unamortized premium)
and any related transaction costs.
● Reacquisition Cost: The reacquisition cost includes the cash paid, the fair value of
assets transferred, or the fair value of equity instruments issued to retire or
repurchase the debt.
● Income Statement Recognition: Gains and losses are typically reported in the income
statement as part of the income from continuing operations.
BE14.13 (LO 3) On January 1, 2022, Henderson Corporation retired $500,000 of bonds
at 99. At the time of retirement, the unamortized premium was $15,000. Prepare
Henderson’s journal entry to record the reacquisition of the bonds.
Answer:
1. Determine the carrying value of the bonds at the time of retirement:
Carrying value = Face value of bonds - Unamortized premium
Carrying value = $500,000 - $15,000 = $485,000
2. Determine the gain or loss on retirement:
Gain or loss = (Retirement price - Carrying value) x Number of bonds retired
Gain = (99% x $500,000) - $485,000 = ($495,000)- $485,000 = $10,000
Journal Entry:
January 1, 2022
Face Value of Bonds $500,000
Unamortized Premium $15,000
Gain on Retirement of Bonds $10,000
Carrying Value of Bonds Retired $525,000
