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A government defeased in substance $5,000,000 of outstanding general obligation bonds several years prior to their maturity. The government paid $6,000,000 into an irrevocable trust to accomplish the defeasance in substance. The payment included $3,000,000 of proceeds from new bonds issued that were to provide resources for the bond defeasance. The other $3,000,000 had been accumulated over previous years from taxes and interest earnings in the Debt Service Fund. The government should report the payment in its Debt Service Fund as?

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Answer:

The government should report the payment in its Debt Service Fund as:

Other financing use of $3,000,000 and expenditure of $3,000,000

Explanation:

Because the resources of $6 million for defeased in substance in bond balance sheets must be set aside offset thus if the resources come from 2 different entries should be net off in 2 different entries.

Thus $3 million of proceeds from new bonds is expenditure while another $3 million  accumulated over previous years from taxes and interest earnings is other financing use.

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