A State Has 4

Essay

A state has 4.5% fixed rate debt that was issued at a par value of $10 million. Market interest rates have fallen, so the state issues new 3% fixed rate debt at par, and calls in the 4.5% bonds, paying a call premium of $500,000. The proceeds from the new debt are held in an escrow account to be used to pay the old bondholders.
Required
a. How much 3% debt must be issued to refund the 4.5% bonds?
b. Prepare the journal entries to record the above events, assuming the debt refunding is reported in a debt service fund.
c. Prepare the journal entries to record the above events, assuming the debt refunding is reported in an enterprise fund.