Case Study

Think fast Inc. is a brick and mortar business focusing on selling cliff notes and other supplemental learning materials to college and graduate students in a variety of subject matters. Due to the massive amount of free education materials that are now available on the internet, its sales have declined dramatically over the years. Wishing to diversify its revenue mix, the company acquired 80% of the outstanding shares of an online dating agency, called, Second Chance. One year after the acquisition, Think fast Inc.'s CFO reviewed the debt position of Second Chance and wished to retire the bonds that Second Chance issued at higher interest rates 5 years ago. The bonds have a maturity date of 10 years from issuance. The contract stipulated an early retirement price of 108 percent of face value. Wishing to avoid paying such a high price for the early retirement of bonds, Think fast acquired the bonds from the open market at 103 percent of face value. This purchase created an effective loss of $250,000 on the debt, the excess of the price over the book value of the debt as reported on Second Chance's books. 1. How should this loss be reported? 2. Who does this loss belong to? 3. Do you agree with the decision in retiring this debt?