Good Day I am stuck, I don\'t know where to even start with calculating this que

Question

Good Day I am stuck, I don't know where to even start with calculating this question!

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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

Explanation / Answer

Answer: $22980 Cr

First of all we have to calculate Bond Value After 1 Year.

Working note

PVFactor

Bond Price B0= (Annual Interest*(PVIFA Required return,n))+(Maturity Value*(PVIF Required return,n)) Face Value $3750000 Coupon Rate 8% Annual Interest $300000 Years to maturity (5-1) 4 Discount Rate 7% Bond Price B0= (Annual Interest*(PVIFA 7%,4years))+(Maturity Value*(PVIF 7%,4 years)) Bond Price B0= (300000*(PVIFA 7%,4years))+(3750000*(PVIF 7%,4 years)) Bond Price B0=(300000* 3.387211256)+(3750000*0.762895212) Bond Price B0= $3877020

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