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Reacquisition of Debt Definition

Definition

The word re acquisition of debt identifies at least one of 2 procedures a corporation can utilize to lessen the quantity of debt seeming on its own balance sheet. Re-acquisition of debt may refer to this practice of buying back bonds in the open market and holding them into treasury, or the practice of a telephone feature.

Reacquiring these obligations before their maturity is described as early extinguishment of debt. Accounting rules require businesses to report the profit or loss that develops with those trades.

Explanation

Issuing longterm bonds represents an essential source of financing for a lot of businesses.
Often times organizations begin a sinking fund, that will be used to refund shareholders once the bonds grow. Now, your debt is supposed to become extinguished.

If an organization reacquires debt until the scheduled maturity date, then the trade is known since early extinguishment of debt. Funding is considered extinguished whenever there isn’t any additional duty into a outside party to transport economic advantages. When that happens, the responsibility can be taken out of the business ‘s balance sheet.

Reacquisition of debt describes two procedures:

  • Open Market Purchases: at precisely the exact same manner traders can buy bonds of the business on the available market, the issuing business may re purchase bonds that they ‘ve issued and also hold them as treasury securities.
  • Call Features: When the bonds included a telephone feature, the business may do this directly, paying bond-holders the face price of their security and an agreed-to superior.

Accounting rules require businesses to report that the profit or loss that develops with early extinguishment of debt. Back in years past this has been reported as an outstanding product. FASB ASC 470-50-45: Debt-Modifications along with Extinguishments-Other Presentation Matters today says that they’re classified as an exceptional item in the event the case is considered both unusual in nature and infrequent in occurrence.

Example

Five decades past, Company A issued bonds in 98 using a face value of $1,000,000 and also a period of twenty decades ago The expense to issue those bonds has been $20,000. Company A has made a decision to exercise its best to predict from the bonds, so paying the winners of this security that the agreed-to top of 102. The first discount in the bond has been (1.00 – $ 0.98) x 1,000,000, or $20,000.

The reduction in the reacquisition of these bonds is calculated as:

Reacquisition Price of Bonds ($1,000,000 x 1.02) $1,020,000
Face Value of Bonds $1,000,000
Less: Unamortized Discount ($20,000 X15 /20) $15,000
Less: Unamortized Bond Issue Cost ($20,000 X15 /20) $15,000
Net Carrying Value of Securities $970,000
Loss on Reacquisition of Bonds $50,000

The journal entry to record that the trade would subsequently be:

Debit Credit
Bonds Payable $1,000,000
Loss on Reacquisition of Bonds $50,000
Discount Bonds Payable $15,000
Unamortized Bond Issue Costs $15,000
Cash $1,020,000