Cool Care, an SEC registrant and a hospital operator in the United States, acquired all of the outstanding common stock of Healthy Hearts, an unrelated third party that operates specialty hospitals focused exclusively on cardiology. After the acquisition, Healthy Hearts become a wholly owned subsidiary of Cool Care (the Acquisition).

Several years before the acquisition, in a public offering, Healthy Hearts raised capital to expand and upgrade its operating rooms by issuing $400 million aggregate principal amount of 7.00% senior notes due in 2020 (the Notes). In performing due diligence and assessing the terms of the Notes, Cool Care determined that it could obtain cheaper financing and instructed Healthy Hearts to make a tender offer for any and all its outstanding Notes (the Tender Offer). Accordingly, contemporaneously with the Acquisition, all the outstanding Notes were redeemed. Healthy Hearts did not have sufficient cash on hand before the Acquisition to redeem the Notes.

Additional Facts: The Acquisition meets the definition of a business combination.

The terms of the Notes did not require Healthy Hearts to redeem or offer to repurchase the Notes upon a change in control (i.e., the decision to redeem the Notes was voluntary).

It was Cool Cares decision to redeem the Notes.

The fair value of the Notes as of the date of the Acquisition was equal to the amount paid to redeem the tendered Notes. In addition, Healthy Hearts carried the Notes at their par value (i.e., there is neither a premium nor a discount present with the Notes).

Required:

In consideration of the information presented above, answer the following questions.

1. Should Healthy Hearts include the extinguishment of debt (i.e., the Notes) in its precombination financial statements or should Cool Care include it in its postcombination financial statements? Depending on the answer, determine the gain or loss on the extinguishment of debt to be recognized. (Note that for this question, the precombination financial statements represent Healthy Hearts operations before the Acquisition and the postcombination financial statements represent Cool Cares consolidated financial statements after the Acquisition.)

When addressing the case, it will be useful to review the guidance in ASC 805-10-25-20 and 25-21.

Other applicable professional pronouncements that are relevant (but not necessarily directly) include the following:

ASC 405-20, Liabilities: Extinguishments of Liabilities (ASC 405-20)

ASC 470-50, Debt: Modifications and Extinguishments (ASC 470-50)

ASC 805-10, Business Combinations: Overall (ASC 805)

ASC 805-20, Business Combinations: Identifiable Assets and Liabilities, and Any Noncontrolling Interest (ASC 805-20)

ASC 805-30, Business Combinations: Goodwill or Gain From Bargain Purchase, Including Consideration Transferred (ASC 805-30)