Extinguishment of debt under GAAP requires which treatment for existing deferred financing costs as of the extinguishment date?

Extinguishment of debt under GAAP requires which treatment for existing deferred financing costs as of the extinguishment date?

• A. write off the carrying amount
• B. capitalize and amortize over the term of the new loan
• C. amortize over the carrying amount
• D. expense immediately

Answer: (A)

When you extinguish debt under GAAP, you measure a loss or gain on extinguishment as the difference between the old debt’s carrying amount and the amount paid to settle it. The carrying amount includes any unamortized deferred financing costs. Because the old liability is being settled, those unamortized costs no longer provide future benefits and must be removed from the books, i.e., written off, as part of the loss on extinguishment. They are not capitalized into the new loan or amortized over the new loan’s term. If you incur new financing costs for the replacement debt, those would be treated separately for the new debt. So, the correct treatment is to write off the carrying amount of the existing deferred financing costs.

When you extinguish debt under GAAP, you measure a loss or gain on extinguishment as the difference between the old debt’s carrying amount and the amount paid to settle it. The carrying amount includes any unamortized deferred financing costs. Because the old liability is being settled, those unamortized costs no longer provide future benefits and must be removed from the books, i.e., written off, as part of the loss on extinguishment. They are not capitalized into the new loan or amortized over the new loan’s term. If you incur new financing costs for the replacement debt, those would be treated separately for the new debt. So, the correct treatment is to write off the carrying amount of the existing deferred financing costs.