Reference no: EM132698107
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: At a market price of 93, was the market interest rate on the date of redemption greater than, less than, or equal to 9%? Explain your answer.
Question 2: Assume the redemption resulted in a gain for Shen Ltd. You have been asked to help assess the immediate impact of the redemption on Shen Ltd's return on asset ratio. In your answer, first identify the numerator and denominator of the ratio; then explain the impact, if any, on the numerator; finally, explain the impact, if any, on the denominator. Then conclude as to the overall effect.