Question

In: Accounting

On January 1, 20X5, Hillside Inc. bought $3,750,000 of five-year, 8% Straight Arrow bonds. The bonds...

On January 1, 20X5, Hillside Inc. bought $3,750,000 of five-year, 8% Straight Arrow bonds. The bonds pay interest annually on December 31. When Hillside bought the bonds, the market rate of interest was 7% and the company classified the bond investment as FVOCI.

Market value information on the bonds:

Date Market value

December 31, 20X5 $3,900,000

December 31, 20X6 3,800,000

December 31, 20X7 3,850,000

December 31, 20X8 3,650,000

December 31, 20X9 3,750,000

What is the balance in the reserves account — accumulated other comprehensive income (AOCI) — at December 31, 20X6, that is associated with these bonds?

a) $22,980 CR

b) $48,411 DR

c) $71,391 DR

d) $94,371 DR

Solutions

Expert Solution

AOCI represents difference between fair value and amortized price of bonds.

Particulars Cash flow Discount factor Discounted cash flow
present value Interest payments-Annuity (7%,3 periods) $               300,000.00 2.62432 $        787,294.81
Present value of bond face amount -Present value (7%,3 periods) $            3,750,000.00 0.81630 $     3,061,117.04
Bond price $     3,848,411.85
Less: fair value $   (3,800,000.00)
Premium/(Discount) $          48,411.85
Interest amount:
Face value 3,750,000
Coupon/stated Rate of interest 8.000%
Frequency of payment(once in) 12 months
Interest amount 3750000*0.08*12/12= $        300,000.00

Answer is $48,411.85 DR


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