Use the Following Information to Answer Question

question 43

Multiple Choice

Use the following information to answer question
Due to changes in the prevailing interest rates, Washington County has decided to issue new 5% 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% bond issue.The 6.5% bonds were originally issued to fund highway projects and the debt is reported in the Schedule of Long-term Obligations and in the governmental activities column of the government-wide financial statements.The old 6.5% bonds are still actively traded in the bond market and will be until their maturity.The new 5% bonds will be sold to an institutional buyer who may also sell them in the bond market.
-A governmental entity has elected to issue new debt and use the proceeds to redeem existing debt because there is an economic gain in doing so.There is, however, an "accounting loss" associated with these events.An accounting loss is defined as

• A)The present value of the principal and interest payments on the new debt less the present value of the principal and interest payments on the old debt.
• B)The present value of the principal and interest payments on the old debt less the present value of the principal and interest payments on the new debt.
• C)The cash paid to redeem the old debt less the book value of the old debt.
• D)The face value of the new debt less the cash paid to redeem the old debt.

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Definitions:

Comprehensive Income

An overall measure of all changes in equity from non-owner sources, capturing both realized and unrealized gains and losses.

Cost-Cutting Project

Initiatives or plans implemented by a business to reduce its expenses and increase efficiency, aiming to improve overall profitability.

Erosion

In finance, the gradual reduction of the value of an asset or earnings, often due to external factors or new projects cannibalizing existing project revenues.

Incremental Cash Flows

The additional cash flows a business expects to generate from taking on a new project or making an investment decision.