Question

Question: How are gains and losses from extinguishment of a debt classified in the income statement? What disclosures are required of such transactions?

Short answer

Answer

Gains and losses from extinguishment of debt shall be accumulated and, if material, categorized as an extraordinary item, net of associated income tax effect. For extinguishment of debt transactions, disclosure is needed to show the effect of income tax in the phase of extinguishment.

Step-by-step solution

Meaning of Extinguishment of Debt

Debt extinguishment takes place when the borrower pays the full amount of debt, and the creditor liberates the borrower. Extinguishment is the revocation of constitutional rights, interest or contract.

Gains and losses from extinguishment of debt and disclosure for such transactions

Gains or losses from extinguishment of debt should be collected and listed in income.

Disclosure is essential for the following items for the purpose of extinguishment of debt transactions. They are:

• An illustration of the transactions involving the sources of any funds used to extinguish debt if it is possible to recognize the sources.
• The value per share of the accumulated gain or loss net of associated tax effect.