American Greetings Corporation, a large producer of greetings cards, repurchased some of its outstanding long-term debt. Shortly thereafter the company issued new debt. At the time of the refinancing, where old debt was replaced by new debt, the balance sheet value of the repurchased debt was $142.2 million. The company’s income statement contained a $39.0 million loss related to the cost of the debt repurchase.
a. How much cash did American Greetings pay to repurchase the outstanding debt?
b. Explain why a loss was recognized on the transaction.
c. Why would a company repurchase debt if it led to a loss being recognized on the income statement?