HP, Inc. (formerly Hewlett-Packard Company) issued zero-coupon notes at the end of its 1997 fiscal year that mature at the end of its 2017 fiscal year. $1,800,000,000 face amount of 20-year debt sold for $968 million, a price yielding an implicit annual interest rate of 3.149%. In fiscal 2002, HP repurchased $257 million in face value of the notes for a purchase price of $127 million, resulting in a gain on the early extinguishment of debt.

Discuss the financial statement effects of these transactions. In your analysis, include the following:

(Express all numbers in millions; for example, the face amount is $1,800.)

1. The journal entry HP Inc. used to record the issuance of the zero-coupon notes in 1997.

2. An amortization schedule for the notes. Assume interest is calculated annually.

3. The specific (dollar amount) effect on HPs net income and cash flows in 1998. Consider that accrued interest expense is deductible on the corporate tax return, and assume HPs tax rate is 35%.

4. The general financial statement effects of the notes, in terms of increases and decreases to net income and balance sheet accounts, over the 20-year term.

5. The journal entry HP Inc. used to record the early extinguishment of debt in 2002, assuming the repurchase was made at the end of the year. (Hint: Repurchasing some of the notes before the maturity date is early extinguishment of the debt. Consider the reduction in both the Discount account and the Notes Payable account. Note that the book value of the debt at the end of 2002 can be found in the amortization schedule.)

6. Your comments on why HP might have chosen to issue zero-coupon notes instead of interest-bearing notes, and why they might have decided to repurchase some of the notes in 2002.