Rite Aid Financial Reporting Case Long Term Debt Essay

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Pages: 6

Long-Term Debt
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 over the term of the debt.
Convertible is a type
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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.


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, the firm will reduce a liability and increase equity on the