"In-substance defeasance" is a term used to refer to an arrangement whereby
A) a company gets another company to cover its payments due on long-term debt.
B) a governmental unit issues debt instruments to corporations.
C) a company provides for the future repayment of a long-term debt by placing purchased securities in an irrevocable trust.
D) a company legally extinguishes debt before its due date.

Question

Quizplus · Accepted Answer

In-substance defeasance is an accounting technique used by companies to remove long-term debt from their books. The company purchases securities such as government bonds or other high-grade bonds and places them in an irrevocable trust. The cash flows from the purchased securities are then used to make the debt payments, effectively extinguishing the debt before its due date. This technique reduces the company's debt burden and can improve performance ratios such as debt-to-equity and interest coverage ratios.

"In-Substance Defeasance" Is a Term Used to Refer to an Arrangement