Question

When a company acquires an affiliated company's debt instruments from a third party, the gain or loss on extinguishment of the debt is calculated as:

(A) The difference between the face amount of the debt and the amount paid to extinguish it.
(B) The difference between the net carrying amount of the debt and the amount paid to extinguish it.
(C) The difference between the face amount of the debt and the unamortized debt issuance costs.
(D) The difference between the net carrying amount of the debt and the unamortized debt discount.

Answer 1

The gain or loss on extinguishment of debt when a company acquires an affiliated company's debt instruments from a third party is calculated as the difference between the net carrying amount of the debt and the amount paid to extinguish it.

Step-by-step explanation:

The gain or loss on extinguishment of debt when a company acquires an affiliated company's debt instruments from a third party is calculated as the difference between the net carrying amount of the debt and the amount paid to extinguish it. This means that the gain or loss is determined by subtracting the amount paid to extinguish the debt from the net carrying amount of the debt.

For example, if the net carrying amount of the debt is $10,000 and the company pays $9,000 to extinguish it, the gain or loss on extinguishment would be $1,000. If the company pays more than the net carrying amount, there would be a gain. If the company pays less than the net carrying amount, there would be a loss.