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. (premium)
b) AED240,000 face value, 5%, 5-year bonds issued at 100. (no discount)
c) AED300,000 face value, 9%, 6-year bonds issued at 98. (discount)
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?