Gains on the extinguishment of debt occur when a company settles or repurchases its debt for

less than its carrying amount on the balance sheet. This can lead to significant financial impacts
and accounting implications. Here’s a detailed look:

Definition and Context

• Extinguishment of Debt: This refers to the act of settling or eliminating a debt

obligation before its maturity, which can happen through repayment, repurchase, or exchange.
The extinguishment is considered a gain if the amount paid to settle the debt is less than its
carrying value.

How Gains on Extinguishment of Debt Arise

1. Debt Repurchase: A company buys back its bonds or other debt instruments in
the open market at a price lower than their carrying value. For example, if a bond with a carrying
value of $1 million is repurchased for $900,000, the company realizes a gain of $100,000.
2. Debt Settlement: A company negotiates with creditors to settle a debt for less
than its recorded amount. This often happens during financial distress or restructuring.
3. Debt-for-Equity Swap: Creditors agree to accept equity in the company instead of
cash, typically at a value less than the debt’s carrying amount.