Sun Company, an oil-refining concern, purchased all of its outstanding 8.5 percent (stated rate) debentures as part of a restructuring plan. The balance sheet value of each outstanding debenture at the time of the repurchase was $875, and the company paid $957.50 for each $1,000 face value bond.
REQUIRED:
a. What is a debenture? Would such bonds tend to be issued at higher or lower prices than secured bonds? Why?
b. Briefly discuss why a company would repurchase its outstanding debt.
c. Explain how this repurchase would affect (increase, decrease, or have no effect on) the components of the accounting equation: assets, liabilities, shareholders' equity. Would a gain or loss be recognized on the transaction?
d. Would the gain or loss be recognized if Sun Company had not repurchased the bonds? Why or why not?