Question: Consider the 4.75% convertible notes due December 2006. Asumme that interest is paid annually.
i. What is the face value (or principal) of these notes? What is the carrying value (net book value) of these notes? Why do the two values differ?
ii. How much interest did Rite Aid pay on these notes during the fiscal 2004?
iii. Determine interest expense on these notes for the year ended February 28, 2004. Note that there are cash and non-cash portion to interest expense on these notes because they were issued at a discount. The non-cash portion of interest expense is the amortization of the discount during the year (that is, the amount by which the discount decreased during the year).
iv. Prepare the journal entry to record interest expense on these notes for 2004. Consider both the cash and discount (non-cash) portions of the interest expense from part iii. above.