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On 1 April 2018, Shen Ltd acquired specialised equipment by issuing $2,700,000 of face value, 9% ten-year bonds to the equipment's manufacturer. No cash changed hands. The bonds will pay interest semi-annually, beginning with the first payment due on 1 October 2018. The market interest rate on the issue date was 10%. The equipment, which was available for use immediately, will be depreciated under the declining balance method at 30%. The estimated residual value is $200,000. Ignore GST. Round to two decimal places.
Required:
Question 1: How much interest expense will be recognised over the life of the bonds?
Question 2: Why isn't the total amount of interest expense shown as a liability on 1 April 2018, given that it is highly probable that Shen Ltd will pay (relevance) and the amount can be measured without error (faithful representation)?
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