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CFA Level I · CFA Level I Exam · Topics in Long-Term Liabilities and Equity

A company issued a five-year bond at a premium. After two years, it repurchases the entire bond in the market at a price below its carrying amount. Under IFRS, the company will most likely report:

The company will report a gain in profit or loss equal to the carrying amount, including unamortized premium, minus the repurchase price. Extinguishment differences go through profit or loss, and buying back below carrying amount creates a gain.

  1. Aa gain in profit or loss equal to the difference between the carrying amount and the repurchase priceCorrect
  2. Ba loss in profit or loss because the bond was originally issued at a premium
  3. Ca direct adjustment to retained earnings with no effect on profit or loss

Explanation

On extinguishment, the difference between the carrying amount (including unamortized premium) and the amount paid is recognized in profit or loss. Paying less than carrying amount produces a gain. Original issue at a premium does not create a loss.

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