Extinguishment Of Debt Essay

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“What’s a little debt between friends?” The accounting concept of extinguishment of debt has come a long way through the past years. This the fascinating aspect of accounting where things are constantly changing to adapt to the current times. The extinguishment of debt in broad terms, is to eliminate debt by paying the outstanding debt owed or exchanging it with another debt instrument. Extinguishment of debt comes to life with its various different specifications of transactions. Two ways debt can be extinguished are be paying off the total owed in full before the maturity date or by converting the debt for a company’s own stock and becoming shareholders. In reference to related-party transactions involving capital stock transactions and…show more content…
If the extinguishment, for example of converting debt to stock, is determined to not be a capital transaction then the gain or loss is calculated by deducting the outstanding debt from net carrying value of the debt. “SFAS No. 4, effective until 2002, required that gains/losses from early debt retirements be reported as extraordinary items below the line, regardless of whether they were unusual or infrequent.” SFAS No. 145, issued on April 2002 and effective to this day, specifies that early extinguishment of debt resulting in gains or losses should only be classified as an extraordinary item if they are both unusual and…show more content…
Pucek, CPA, and Glenn E. Richards, CPA, “in circumstances outside of troubled debt restructuring, the relevant accounting guidance (FASB ASC Section 470-50-40, Debt Modifications and Extinguishments) states that “extinguishment transactions between related entities may be in essence capital transactions.” If the extinguishment of debt is realized to be a capital transaction then it cannot recognize a gain or a loss. It is difficult to clearly differentiate between a capital transaction and recognition because there are little measures for this

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