Consider the 8.125% notes due 2010. Assume that Rite Aid issued these notes on May 1, 2003 and that the company pays interest on the last day of April each year.

i. According to a press release issued by Rite Aid at the time of the issuance, the proceeds of the notes issue were 98.688% of the face value of the notes. Prepare the journal entry that Rite Aid must have made when these notes were issued.

ii. At what effective annual rate of interest were these notes issued?

iii. Create an amortization table using the effective method. The face value of this debt is $360,000, the discount is $4,723.20; the coupon rate is 8.125% and the effective rate (including fees) is 8.3803%.

Date	Interest Payment	Interest Expense	Bond Discount Amortization	Net Book Value of Debt	Effective Interest Rate
5-1-2003				355,276.80
5-1-2004	29,250.00
5-1-2005
5-1-2006
5-1-2007
5-1-2008
5-1-2009
5-1-2010

iv. Prepare the journal entry that Rite Aid must have recorded February 28, 2004 to accrue interest expense on these notes.

v. Based on your answer to part iv. what is the book value of the notes at February 28, 2004?

vi. Create an amortization table using the straight line method. The face value of this debt is $360,000, the discount is $4,723.20; the coupon rate is 8.125% and the effective rate (including fees) is 8.3803%. Under this method, does Rite Aid report the same interest rate on these notes each year?

Date	Interest Payment	Interest Expense	Bond Discount Amortization	Net Book Value of Debt	Straight Line Interest Rate
5-1-2003				355,276.80
5-1-2004	29,250.00
5-1-2005
5-1-2006
5-1-2007
5-1-2008
5-1-2009
5-1-2010

vii. Compare the year by year difference in interest expense derived from each method. What pattern do you observe? Is the difference material in any year?