Question 1 - Calculate the total amount of interest expense over the life of the bonds for the following independent situations.
a) AED100,000 face value, 10%, 10-year bonds issued at 101.
b) AED240,000 face value, 5%, 5-year bonds issued at 100.
c) AED300,000 face value, 9%, 6-year bonds issued at 98.
Question 2 - ABC Corporation issued AED2,000,000 of 10%, 6-year bonds dated July 1, 2011, with semiannual interest payments . The bonds were issued on January 1, 2011, at 97. ABC's year-end is December 31.
a) Were the bonds issued at a premium, a discount, or at par?
b) Was the market rate of interest higher, lower, or the same as the contract rate of interest?
c) If the company uses the straight-line method of amortization, what is the amount of interest expense ABC Corporation will show for the year ended December 31, 2011?
Question 3 - On the first day of the current fiscal year, AED2,000,000 of 10-year, 10% bonds, with interest payable annually, were sold for AED2,250,000. Present entries to record the following transactions for the current fiscal year:
(a) Issuance of the bonds.
(b) First annual interest payment.
(c) Amortization of bond premium for the year, using the straight-line method of amortization.
Question 4 - Future Sources, Inc. reported the following results for the year ending July 31, 2012:
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Retained earnings, August 1, 2011
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$875,000
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Net income
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260,000
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Cash dividends declared
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120,000
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Stock dividends declared
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100,000
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Prepare a retained earnings statement for the fiscal year ended July 31, 2012.