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Weald Co. took advantage of market conditions to refund debt. This was the fifth refunding operation carried out by Weald within the last four years. The excess of the carrying amount of the old debt over the amount paid to extinguish it should be reported as a (an):
a. Extraordinary gain, net of income taxes.
b. Deferred credit to be amortized over life of new debt.
c. Part of continuing operations.
d. Extraordinary loss, net of income taxes.
Explanation
Choice "c" is correct. Many companies and agencies extinguish (or refund) long-term debt prior to maturity as a method of managing financial risk. In this case, the refunding is not considered an extraordinary event because it is not unusual and infrequent. The gain (retirement price less carrying amount of the old debt) will be included as part of continuing operations.
Choice "b" is incorrect. Gains or losses on early retirement of debt must be recognized at the time of the transaction.
Choice "a" is incorrect. The gain is not an extraordinary item, per the above discussion.
Choice "d" is incorrect. There is a gain on the refunding, not a loss, and the classification does not meet the extraordinary item criteria.
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