Question
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:
- the issue of the convertible bonds on 1 July 2021; and
- the interest payment and subsequent measurement of convertible bonds on 30 June 2022.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started