Toobits ltd issues $5m in convertible bonds on 1 july 2018. They are issued at their face value for a term of 4 years. They pay an interest rate of 5% annually in arrears. The bonds may be converted into shares at any point during those 4 years. Organisations similar to Toobits ltd have recently issued similar debt instruments (without the conversion option) at an interest rate of 7%.

On the 30 june 2021, all the holders of the convertible notes elect to convert the bonds to shares in Toobits ltd.

Diddies ltd purchased $1m of the comvertible bonds from Toobits ltd when they were issued on 1 july 2018, within a bond-trading business model. On the same date, Diddies ltd paid $5,000 of brokerage costs associated with purchasing the bonds.

a) identify the present value of the bond liability and calculate the equity component.

b) calculate the stream of interest expense across the life of the bonds.

c) provide the appropriate journal entries for Toobits ltd in relation to the convertible bonds for the period 1 july 2018 to 30 june 2021

d) provide the appropriate journal entry(ies) for Diddies ltd on the 1 july 2018