On July 1, 20X1, Heflin Corporation (a fictional company) issued $20 million of 12%, 20-year bonds. Interest on the bonds is paid semiannually on December 31 and June 30 of each year, and the bonds were issued at a market interest rate of 8%.

Required:

1. Compute the bonds’ issue price on July 1, 20X1.

2. Prepare an amortization schedule that shows interest expense, premium or discount amortization, bond carrying value, and cash interest payment for each interest payment period through June 30, 20X6.

3. Prepare the journal entries to record all interest expense and all cash interest payments for 20X2.

4. A new employee in the accounting group at Heflin has asked you to explain why interest expense on the bonds changes each year. Write a short memo that helps the employee understand interest recognition for these bonds.

5. On July 1, 20X7, the company exercised a call provision in the debenture agreement and redeemed 40% of the bonds at 105% of par. What journal entry did the company make to record this partial redemption? Ignore income taxes.

6. The market yield for the bonds on July 1, 20X7, was 10%. How much less did the company pay to retire bonds using the call provision than it would have paid using an open market purchase?