Due to changes in the prevailing interest rates, Washington County has decided to issue new 5 percent bonds and place the proceeds with a trustee in a manner structured to satisfy all the GASB requirements for an in-substance defeasance of an existing 6.5 percent bond issue. The 6.5 percent bonds were originally issued to fund highway projects and the debt is reported in the governmental activities column of the government-wide statement of net position. The old 6.5 percent bonds are still actively traded in the bond market and will be until their maturity. The new 5 percent bonds will be sold to an institutional buyer who may also sell them in the bond market.
-What amount of gain or loss should be recognized on this transaction?
A) None.
B) The difference between the total principal and interest payments on the old debt and the total principal and interest payments on the new debt.
C) The difference between the present value of the principal and interest payments on the old debt and the present value of the principal and interest payments on the new debt.
D) The difference between the economic cost and the call price.

Question

Due to changes in the prevailing interest rates, Washington County has decided to issue new 5 percent bonds and place the proceeds with a trustee in a manner structured to satisfy all the GASB requirements for an in-substance defeasance of an existing 6.5 percent bond issue.   The 6.5 percent bonds were originally issued to fund highway projects and the debt is reported in the governmental activities column of the government-wide statement of net position.  The old 6.5 percent bonds are still actively traded in the bond market and will be until their maturity.  The new 5 percent bonds will be sold to an institutional buyer who may also sell them in the bond market. 
-What amount of gain or loss should be recognized on this transaction?
A) None.
B) The difference between the total principal and interest payments on the old debt and the total principal and interest payments on the new debt.
C) The difference between the present value of the principal and interest payments on the old debt and the present value of the principal and interest payments on the new debt.
D) The difference between the economic cost and the call price.

Quizplus · Accepted Answer

The correct answer is the difference between the present value of the principal and interest payments on the old debt and the present value of the principal and interest payments on the new debt. This approach aligns with accounting principles for measuring the gain or loss on debt restructuring or refinancing, focusing on the present value to reflect the time value of money.

Due to Changes in the Prevailing Interest Rates, Washington County