A government defeased in substance $10 million of old Enterprise Fund bonds by paying $12 million into a qualifying trust for that purpose. The refunded bonds had an unamortized premium of $200,000 and bond issue costs of $50,000. Resources to finance the defeasance of the old bonds were provided by issuing $12,000,000 of new bonds issued at par. What amount of deferred interest expense adjustment should the government report?

Question

Quizplus · Accepted Answer

The deferred interest expense adjustment is calculated as the difference between the present value of the new bonds and the carrying value of the old bonds. The present value of the new bonds is $12,000,000, and the carrying value of the old bonds is $10,200,000 ($10,000,000 face value + $200,000 unamortized premium - $50,000 bond issue costs). Therefore, the deferred interest expense adjustment is $1,800,000 ($12,000,000 - $10,200,000).

A Government Defeased in Substance $10 Million of Old Enterprise