Q#1. (25 marks)

This question consists of 2 independent sub-questions

1.DISTAFF & SPEAR, Inc., issued $250,000 of 8%, 15-year bonds at 103 on July 1, 2007. Interest is payable semi-annually on December 31 and June 30. Through June 30, 2014 DISTAFF & SPEAR amortized $3,186 of the bond premium. On July 1, 2014 DISTAFF & SPEAR retired bonds at 98. Prepare journal entries to record (i) issue (3 marks) and (ii) retirement of these bonds. (Assume the June interest expense has already been recorded.) (7 marks)

2. At t=0, Queen Safa, Inc, issued a $100,000 B/P for 20 years (due at t=20). At the end of every year for 10 years, the bond pays interest (coupons) of 12% per year. [For t=1,2,...,10] Then for the remaining 10 years, the bond pays interest of 6% per year. [For t=11,12,...,20] At the end of the 18th year, at t=18, after paying the annual interest, Queen Safa redeems the bond at 88. The bond is priced to yield 10% per year. Prepare journal entries to record (i) issue (5 marks) and (ii) retirement of these bonds. (Assume the June interest expense has already been recorded.) (10 marks)

The factor for ordinary annuity for 10 years at 10% is 6.14457

The present value factor for 10 years at 10% is 0.38554; for 20 year, it is 0.14864