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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

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.

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