DPC, an electric utility, has $100 million of bonds payable outstanding that mature in five years.The utility acquires U.S.government securities whose periodic interest payments and maturity value exactly equal those on the utility's outstanding bonds.The firm intends to use the cash received from the government bonds to make required interest and principal payments on its own bonds.The electric utility could also have used its cash to purchase its bonds in the marketplace.Based on the above, DPC should treat these securities as

Question

Quizplus · Accepted Answer

Holding U.S. government securities whose payments match those made to bondholders is essentially the same as setting aside cash to meet debt service obligations. When a corporation designates a fixed-maturity debt security as held to maturity, it carries it at amortized cost, not market value, on the balance sheet.

DPC, an Electric Utility, Has $100 Million of Bonds Payable