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Rite Aid Financial Reporting Case Long Term Debt

1339 words - 6 pages

Long-Term Debt
Concepts
A.
i. Secured debt of Rite-Aid is backed by and tied to specific assets of the corporation while unsecured debt is based on their credit-worthiness to pay this debt. Distinguishing between secured/unsecured debts provides needed information to investors, credit rating agencies, and lenders.
ii. Guaranteed means a promise to answer for payment of debt or performance of some obligation if the entity liable fails to perform. Rite-Aid's wholly owned subsidiaries guarantee the debt.
iii. Senior denotes the debt holders that have the highest rights of priority if a firm falls into bankruptcy.
Fixed-rate is the term the means the interest rate remains constant ...view middle of the document...

Each period until maturity, the increase in the amount of interest expense represents amortization using the effective interest method of the difference between the initial value of the loan and the maturity value.

ii. Interest payment = face value * coupon rate
interest payment = $410,000,000*0.09375 = $38,437,500

iii. 2010 Balance – 2009 Balance = $405,951,000 - $405,246,000 = $705,000
Interest Expense = Interest payment + change in carrying value = $38,437,500 + $705,000
Total Interest Expense = $39,187,500
Cash portion = $38,437,500 and the noncash portion to Notes Payable is $705,000[

iv. Dr Interest Expense $39,187,500
Cr Notes Payable $705,000
Cr Cash $38,437,500`

v. Interest rate = Interest Expense (FY2009)/Beg Yr Balance (FY2009)
Interest rate = $39,187,500/$405,246,000
Interest rate = 9.67%

e.

i. June 30, 2009
Dr Cash $402,620
Dr Bonds Payable $402,620

ii. Effective annual interest rate is 10.1212%

iii. ON SPREADSHEET (last page)

iv. 8 months interest expense - Feb 27th, 2010
Dr Interest Expense $27,167
Cr Cash $26,650
Cr Bonds Payable $ 517

v. Net Book Value - Feb 27th, 2010 = $402620 + $517 = $403,137

vi. ON SPREADSHEET (last page)
vii. The interest expense increases with the effective interest method over time, whereas the straight method remains constant as the effective interest rate declines. The differences are relatively immaterial, but the more noticeable differences occur in the earlier and later years of the bond with the interest rate converging in the middle of the term.

f.
i. Dr Notes Payable $801,519,000
Cr Gain on Retirement of Note $3,750,000
Cr Cash $797,769,000

ii. They did not pay the face value at the time of sale because the notes were several years from maturity and therefore the carrying value was not yet fully amortized to the face value of the note.

iii. The market rate of interest is higher than both the coupon rate and the effective rate of interest. We know the effective rate exceeds the coupon rate because the bonds were issued at a discount. Since there was a gain upon retirement of debt on the open market, we know that the current market rate must exceed the effective rate of interest at time of issue. Therefore since the current market interest rate exceeds the effective rate and the effective rate exceeds the coupon rate, the current market interest rate must exceed the coupon rate.

g.

Firms use convertible notes primarily to attract lower interest rates and to attract investors that may not otherwise be interested. They also may have little choice on credit markets without offering additional options to the potential investors. Convertible notes provide investors additional opportunity to gain an equity position in a firm if the firm is outperforming the interest gains from the note. If converted,...

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