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
ekkarill92 answered 2 years agoRelated Solutions
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