NewStar Ltd issued 1 million convertible bonds on 1 July 2021. The bonds had a term of three years and were issued with a total fair value of $1 million which is also the par value. Interest is paid annually in arrears at a rate of 6% per annum. Bonds without the conversion option attracted an interest rate of 9% per annum on 1 July 2021. If the investor did not convert to shares, they would have been redeemed at par. 

 

Other information:

Present Value of $1 per period in n periods Table (extract):

Period	6%                 9%
3	.8396                 .7722
4	.7921                  .7084

Present Value of an annuity of $1 per period for n periods Table (extract):

 

Period	6%                 9%
3	2.6730               2.5313
4	3.4651               3.2397

 

Required:

a) Determine the amount for the liability and equity components of the convertible bonds. Show your workings. 

b) Prepare the journal entries for NewStar Ltd to record the following transactions: 

1. the issue of the convertible bonds on 1 July 2021; and
2. the interest payment and subsequent measurement of convertible bonds on 30 June 2022.