Problem:
On January 1, 20x1, Red Corp. acquired some of the outstanding bonds of one of its subsidiaries. The bonds had a carrying value of $421,620, and Red paid $401,937 for them.
Required:
Question: How should we account for the difference between the carrying value and the purchase price in the consolidated financial statements for 20x1?
- The difference is added to the carrying value of the debt.
- The difference is deducted from the carrying value of the debt.
- The difference is treated as a loss from the extinguishment of the debt.
- The difference is treated as a gain from the extinguishment of the debt.
- The difference does not influence the consolidated financial statements.
Note: Be sure to show how you arrived at your answer.