HP Inc. (formerly Hewlett-Packard Company) issued zero-coupon notes at the end of its 1997 fiscal year thatmature at the end of its 2017 fiscal year. One billion, eight hundred million dollars face amount of 20-year debtsold for $968 million, a price to yield 3.149%. In fiscal 2002, HP repurchased $257 million in face value of thenotes for a purchase price of $127 million, resulting in a gain on the early extinguishment of debt.Required:1. What journal entry did HP Inc. use to record the sale in 1997?2. Using an electronic spreadsheet, prepare an amortization schedule for the notes. Assume interest is calculatedannually and use numbers expressed in millions of dollars; that is, the face amount is $1,800.3. What was the effect on HP’s earnings in 1998? Explain.4. From the amortization schedule, determine the book value of the debt at the end of 2002.5. What journal entry did HP Inc. use to record the early extinguishment of debt in 2002, assuming the purchasewas made at the end of the year?6. If none of the notes is repaid prior to maturity, what entry would HP use to record their repayment at the endof 2017?
Debenture Valuation
A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.
Note Valuation
It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:
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. One billion, eight hundred million dollars face amount of 20-year debt
sold for $968 million, a price to yield 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.
Required:
1. What
2. Using an electronic spreadsheet, prepare an amortization schedule for the notes. Assume interest is calculated
annually and use numbers expressed in millions of dollars; that is, the face amount is $1,800.
3. What was the effect on HP’s earnings in 1998? Explain.
4. From the amortization schedule, determine the book value of the debt at the end of 2002.
5. What journal entry did HP Inc. use to record the early extinguishment of debt in 2002, assuming the purchase
was made at the end of the year?
6. If none of the notes is repaid prior to maturity, what entry would HP use to record their repayment at the end
of 2017?
Trending now
This is a popular solution!
Step by step
Solved in 4 steps with 5 images
