Debt extinguishment definition
/What is Debt Extinguishment?
Debt extinguishment occurs when a debt instrument is terminated. This occurs when the borrower repays the lender or bonds are retired by the issuer. Extinguishment may not involve full repayment of a debt; the two parties may agree on a lesser repayment amount if the borrower is unable to make a full repayment of the amount owed.
Accounting for a Debt Extinguishment
The exact outcome of a debt extinguishment will vary, depending on the terms that the parties agree upon. It is likely that the lender will be forced to record a loss. However, the borrower might end up recording a gain, if this party pays less to settle a debt than the amount of the original obligation.