4.75% convertible notes due December 2006 ($250,000 facevalue less unamortized discount of $4,000 and $5,500)
Consider the 4.75% convertible notes due December 2006. Asummethat interest is paid annually.
i. What is the face value (or principal) of these notes? What isthe carrying value (net book value) of these notes? Why do the twovalues differ?
ii. How much interest did Rite Aid pay on these notes during thefiscal 2004?
iii. Determine interest expense on these notes for the yearended February 28, 2004. Note that there are cash and non-cashportion to interest expense on these notes because they were issuedat a discount. The non-cash portion of interest expense is theamortization of the discount during the year (that is, the amountby which the discount decreased during the year).
iv. Prepare the journal entry to record interest expense onthese notes for 2004. Consider both the cash and discount(non-cash) portions of the interest expense from part iii.above.
4.75% convertible notes due December 2006 ($250,000 facevalue less unamortized discount of $4,000 and $5,500)
Consider the 4.75% convertible notes due December 2006. Asummethat interest is paid annually.
i. What is the face value (or principal) of these notes? What isthe carrying value (net book value) of these notes? Why do the twovalues differ?
ii. How much interest did Rite Aid pay on these notes during thefiscal 2004?
iii. Determine interest expense on these notes for the yearended February 28, 2004. Note that there are cash and non-cashportion to interest expense on these notes because they were issuedat a discount. The non-cash portion of interest expense is theamortization of the discount during the year (that is, the amountby which the discount decreased during the year).
iv. Prepare the journal entry to record interest expense onthese notes for 2004. Consider both the cash and discount(non-cash) portions of the interest expense from part iii.above.
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Related questions
Kerala Company borrowed $10,000 on a two-year, zero coupon note. The note was issued on December 31, 2018. The face amount of the note, $12,544, is to be paid at maturity on December 31, 2020. This company uses the straight line method of amortization.
Required:
1. Allocate the interest of $2,544 to the two one-year interest periods, using straight-line interest amortization.
$
2. Prepare the entries to recognize the borrowing, the first year's interest expense, and the second year's interest expense plus redemption of the note at maturity. For compound entries, for those boxes in which no entry is required, leave the box blank.
| 2018, Dec. 31 | Cash | ||
| Discount on Notes Payable | |||
| Notes Payable | |||
| (Record issuance of note at discount) | |||
| 2019, Dec. 31 | Interest Expense | ||
| Discount on Notes Payable | |||
| (Record interest expense) | |||
| 2020, Dec. 31 | Interest Expense | ||
| Notes Payable | |||
| Discount on Notes Payable | |||
| Cash | |||
| (Record interest expense and repayment of note principal) |
Exercise 4-2
On January 1, 2012, Fromer issued $3,000,000 of 12-year, 7 percent bonds. Interest is paid semi-annually on June 30 and December 31. The issue price was $2,592,000.
1.Prepare the January 1, 2012, journal entry that records the bond issue.
1. Compute the following for each semi-annual period:
a. Cash payment.
b. Straight-line discount amortization.
c.Interest expense.
2.Determine the total interest expense recognized over the life of the bonds.
3.Prepare the first two years of an amortization table (use the straight-line method).
| Semiannual Period-End | Unamortized Discount | Carrying Value |
[Create your amortization table here.]
4.For distinguished performance, prepare journal entries for the first two interest payments.
