How does debt buyback flow through the financial statements??
A company has issued $100 of debt but it is currently trading at $50. The company decides to buy back the debt at a discount. How does that flow through the three financial statements?
Thank you!
Assuming 40% tax rate.
I/S:
Other income (expense), net*: +50
Net income: +30
Cash Flow Statement:
Cash Flow from Operating Activities
Net Income: +30
Adjust for gain on retirement of debt: -50
Net cash provided by Operating Activities: -20
Cash Flow from Investing - No Change
Cash Flow from Financing
Net change in cash: -70
B/S:
Assets
Liabilities + S.E.
Debt: -100
R/E: +30 (Inc. in Net Income flows into Retained Earnings line of S.E.)
Notes: *The actual charge should be something to the effect of "Gain on Retirement of Debt," but the line on the I/S will usually look something like this-- the point here is that the gain/loss is NOT included in operating income or expenses because it has nothing to do with the company's core business activities.
That's a fantastic explanation, thank you!
Is it just me, or does that not add up to a -70 cash outflow? = 30 - 50 - 20 - 50 = - 90? How exactly are you getting to - 70?
The net income is non-cash gain. The only cash components are 1) the $50 to retire the debt and 2) the $20 in taxes you had to pay on the gain from retiring the debt at a discount.
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