Colgate County issued $ 1 million of 30-year, 8 percent term bonds to finance improvements to its electric utility plant. The bonds, accounted for in an enterprise fund, were issued at par.
After the bonds were outstanding for 10 years, interest rates fell, and the county exercised a call provision to redeem the bonds for $1.1 million. The county obtained the necessary cash by issuing $1.1 million in new, 20-year, 6 percent bonds.
1. Prepare the entry that the county should have made in its enterprise fund to record the issuance of the original debt (the same entry as in business accounting).
2. Prepare the entry that the county should have made to record the interest expense and payment each semiannual period.
3. Prepare the entry that the county would make to record the redemption of the original debt. Be sure your entry is in accord with the GASB standards.
4. Did the county incur an economic gain or loss by refunding the debt? Of how much?
5. Suppose, instead, that the county could have predicted that it would redeem the debt after it had been outstanding for ten years (20 periods) for $1.1 million.
a. What entry should it have made to record the issuance of the bonds?
b. Over how many periods should the county have amortized the bond discount?
c. During the ten years that the bonds were outstanding, what would have been the average reported interest expense each semiannual period, taking into account the amortization of the bond discount? (Assume that the county amortizes bond discounts on a straight- line basis. Although straight-line amortization is not conceptually sound, it provides a measure of the average amortization that would result if the more correct compound interest method were used.)
d. Prepare the journal entry the county would have made to record interest expense each semiannual period.
6. What is the economic nature of the refunding loss that the county would have to report? In what sense is it really a loss? When did it occur?
7. Compare your response to part 6 with both the GASB and the FASB standards pertaining to recognizing refunding gains and losses. Why would it not be practical to recognize the loss in the periods in which it actually occurs?

  • CreatedAugust 13, 2014
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