The 2008 annual report of Hewlett-Packard Company reports zero-coupon notes issued at the end of its 1997 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 journal entry did Hewlett-Packard use to record the sale in 1997?

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 Hewlett-Packard use to record the early extinguishment of debt in 2002, assuming the purchase was made at the end of the year?