Question

The generally accepted method of accounting for gains or losses from the early extinguishment of debt treats any gain or loss as a(n):

a. adjustment to the cost basis of the asset obtained by the debt issue.
b. amount that should be considered a cash adjustment to the cost of any other debt issued over the remaining life of the old debt instrument.
c. amount received or paid to obtain a new debt instrument and, as such, should be amortized over the life of the new debt.
d.difference between the reacquisition price and the net carrying amount of the debt which should be recognized in the period of redemption.

Answer 1

The correct answer is d. a difference between the reacquisition price and the net carrying amount of the debt which should be recognized in the period of redemption.

Step-by-step explanation:

When the investments available for sale are reclassified to investments to hold until maturity, the rules on valuation and accounting of the latter must be observed. Consequently, unrealized gains or losses, which are recognized in the ORI, must be canceled against the registered value of the investment, since the effect of the fair value will no longer be realized, given the reclassification decision to the category to hold until expiration. In this way the investment must be recorded as if it had always been classified in the category to hold until maturity. Likewise, as of that date the investment must be valued under the same conditions of Internal Rate of Return of the day prior to reclassification.