Early extinguishment of debt produces a gain or loss based on the difference between the carrying amount of the debt and the amount paid to extinguish it. Convertible bonds are treated as debt initially but any value attributable to the equity conversion feature is recognized separately. Bonds with detachable warrants are treated as straight debt with any proceeds allocated to the warrants recognized as paid-in capital. The accounting differs because convertible bonds contain a mandatory conversion feature while warrants are detachable rights that can expire unexercised.
Accounting for Debt Extinguishment and Hybrid Securities
1. intermediate accounting II
CH 14
Question 1: Early extinguishment of debt often produces a gain or a loss. How is the gain or loss
determined?
Question 2: Both convertible bonds and bonds issued with detachable warrants have features of
both debt and equity. How does the accounting treatment differ for the two hybrid securities?
Why is the accounting treatment different?
