On January 1, 2010, Sunshine company issues bonds maturing in 10 years. The par value of the bonds is $500,000, the annual coupon rate is 4%, and the compounding period is annually. The market initially prices these bonds using market interest rate 6%. The market interest rate on December 31, 2010 was 7%.

1. Were the bonds issued at par, at discount or at premium? Why? (3 points)

2. Calculate the issue price. (4 points)

3. Record journal entry on the date of issuance. (3 points)

4. Calculate the interest expense on Dec 31, 2010. (2 points)

5. Record journal entry on the interest expense on Dec 31, 2010. (3 points)

6. Will the interest expense increase or decrease over the years? Why? (3 point)

7. Record journal entry on Dec 31, 2019 for the final redemption (2 point)