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Where are gains or losses from the extinguishment of debt recorded on the income statement?

The answer depends on the nature of operations and whether its usual or unusual for a company to engage in debt restructuring activities. As the visual below outlines, if the debt restructuring is considered normal course of business, then the gain or loss would be reported in continuing operations.

However, if the debt restructuring is unusual or out of the ordinary, then the gain or loss would be recorded as extraordinary, and should be included in the non-operating or non-recurring section of the income statement.


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  • In a TDR settlement, what types of gains are recorded?

    When the debtor and creditor agree to a “settlement”, then the debtor needs to record a gain on the debt and potentially a gain on the asset exchanged. The visual below outline the two types of gain that may need to be recorded by the debtor. For example, Fluffy Bunny Ventures entered into a troubled debt restructuring agreement with National Bank. National agreed to accept land with a carrying amount of $75,000 and a fair value of $100,000 in exchange for a note with a carrying amount of $150,000. As you can see below, Fluffy Bunny Ventures would record a total gain of $75,000.

  • For a troubled debt restructuring involving only a modification of terms, what would be compared to the carrying amount of the debt to determine if the debtor should report a gain on restructuring?

    When the debtor and creditor cannot agree on a settlement, then the next step would be to modify the terms. From an accounting perspective, you would compare the sum of future cash flows to the carrying value of the debt. Total future cash cash flows represents the amounts of both principal and accrued interest owed on a debt at the time of its restructuring. This amount will be the continuation of the payable in accordance with the new terms of the deal. The visual below illustrates how there are two types of modifications:

  • In a settlement, does the extinguishment result in a gain or loss for the debtor?

    Generally, a settlement on extinguishment of debt will result in a gain for the debtor and a loss for the creditor. A gain occurs for the debtor because the fair value of the asset exchanged will be less than the outstanding balance on the loan (i.e. carrying value of the loan). From the creditors perspective, they would accept an asset with a fair market value that is lower than the outstanding portion of the debt, which results in a loss.