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B is corrent. The requirement is to determine the amount of bond interest that should be reported by the City of Walton. General obligation bonds are accounted for in debt service funds, which use the modified accrual basis of accounting. Only the interest cost actually paid in the period is included in interest expense. Accordingly, this answer is correct. Since no interest was paid during the year, interest expense is $0.
A is incorrect. Only the interest cost actually paid in the period is included in interest expense.  
A is incorrect. Only the interest cost actually paid in the period is included in interest expense.  
D is incorrect. Only the interest cost actually paid in the period is included in interest expense.