Turley Corp. would like to raise $1,000,000 on January 1, 2017 to buy an equipment through some form of debt financing. The company’s investment bankers have advised that the expected annual market interest rate will be 10% as of 1/1/2017. Unless otherwise indicated, assume the actual market interest was indeed 10% at the time of financing (for simplicity, we assume the same rate for all scenarios). Given the uncertainty regarding its future cash flow needs and availability, the company is considering several alternative forms of debt financing, but would like to raise $1,000,000 on 1/1/2017:
Raised $1,000,000 by issuing a zero-coupon bonds due on December 31, 2021.
Issued a $1,200,000 face value debentures due December 31, 2021 with an annual coupon payment of $67,250 with coupon payments due December 31.
Raised $1,000,000 by issuing an installment note with equal payments with the first payment due on December 31, 2017 and the last on December 31, 2021.
Debentures
1. Assume Turley Corp. would like to buy back the debentures on December 31, 2018 and that the market interest rate has decreased to 9%. Will the company record a gain or loss on the buy back? Explain (no need to recalculate the buyback price of the bond). Also provide the appropriate citation (including excerpts) from FASB ASC in support of your proposed accounting.