accounting for zero coupon debt when time warner inc announced 241293

Accounting for zero coupon debt. When Time Warner Inc. announced its intention to borrow about $500 million by issuing 20-year zero coupon (single payment) notes, The Wall Street Journal reported the following:

New York-Time Warner announced an offering of debt that could yield the company as much as $500 million…. The media and entertainment giant said that it would offer $1.55 billion principal amount of zero-coupon… notes due [in 20 years]… through Merrill Lynch…. Zero-coupon debt is priced at a steep discount to principal, [which] is fully paid at maturity…. A preliminary prospectus… didn’t include the issue price and yield on the notes.18

Assume Time Warner borrows funds at the beginning of 2008 and pays $1.55 billion in a single payment at the end of 2027,

a. Assume the initial yield on the notes is 6% per year, compounded annually. What initial issue proceeds will Time Warner Inc. realize from issuing these notes?

b. Assume the initial issue proceeds from these notes are $500 million. What is the initial yield on these notes?

c. Assume the initial issue proceeds from these notes are $400 million and their annual yield is 7% compounded annually. What interest expense will Time Warner Inc. record for 2008, the first year the notes are outstanding, assuming that it uses the amortized cost method based on the historical market interest rate?

d. Assume the initial issue proceeds from these notes are $400 million and their annual yield is 7% compounded annually. What interest expense will Time Warner Inc. record for 2027, the last year the notes are outstanding, assuming that it uses the amortized cost method based on the historical market interest rate?

e. Assume that Time Warner Inc. initially issued the notes to yield 6% compounded annually and that the bonds traded in the market on December 31, 2017, to yield 8% compounded annually. Give the journal entry that Time Warner Inc. would make if it repurchased and retired $700 million face value of these zero coupon notes on this date. Round amounts to the nearest one million.

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