On December 31, 2016, Akron, Inc. purchased 5 Percent of Zip Company's common shares on the...
On December 31, 2016, Akron, Inc. purchased 5 Percent of Zip Company's common shares on the open market in exchange for $16,800. On December 31, 2017, Akron, Inc., acquires an additional 25 percent of Zip Company's outstanding common stock for $97,000. During the next two years, the following information is available for Zip Company: Income Dividends Declared Common Stock Fair Value (12/31) 2016 $324,000 2017 $70,000 $7,100 388,000 2018 82,000 14,200 481,000 At December 31, 2017, Zip reports a net book value of $288,000. Akron attributed any excess of its 30 percent share of Zip's fair over book value to its share of Zip's franchise agreements. The franchise agreements had a remaining life of 10 years at December 31, 2017. Assume Akron applies the equity method to its Investment in Zip account: What amount of equity income should Akron report for 2018? On Akron's December 31, 2018, balance sheet, what amount is reported for the Investment in Zip account? Assume Akron uses fair-value accounting for its Investment in Zip account: What amount of income from its investment in Zip should Akron report for 2018? On Akron's December 31, 2018, balance sheet, what amount is reported for the Investment in Zip account?
Homework Answers
Given Information
|
Date of Acquisition |
% shares acquired |
Cost |
Profit |
Dividends declared |
Fair value of common stock |
|
31.12.2016 |
5% |
$ 16,800 |
|||
|
31.12.2017 |
25% |
$ 97,000 |
70,000 |
7,100 |
388,000 |
|
31.12.2018 |
82,000 |
14,200 |
481,000 |
Under equity method, income earned on investment is to be reported in income statement of investor. Later on, the investor would book his profit or losses in his income statement and update the book value accordingly.
|
Computation of Equity income that should Akron report for 2018 |
|
|
Equity income Accrual for 2018 ($82000*30%) |
$ 24,600 |
|
Less: Amortization (See working note) |
3,000 |
|
Equity income in 2018 |
$21,600 |
|
Amount reported in Akron's Balance sheet on Dec 31,2018 for investment in Zip |
|
|
Total Fair Value on 31 Dec 2017 |
$ 116,400 |
|
Equity income for 2018 |
21,600 |
|
Dividend for 2018 (14200*30%) |
(4,260) |
|
Investment in Zip as on Dec 31, 2018 |
$ 133,740 |
Working note
|
Statement showing Allocation and Annual Amortization (31/12/2017) |
|
|
Particular |
Amount |
|
Purchase Price of 25% Interest |
$97,000 |
|
Carrying Amount of 5% Interest ( $388000*5%) |
19,400 |
|
Total Fair Value of Akron's Investment in Zip Account |
116,400 |
|
Net Book Value ($288,000X30%) |
86,400 |
|
Franchisee Agreement (116,400-86,400) |
30,000 |
|
Remaining Life of Franchisee Agreement |
10 |
|
Annual Amortization (30,000/10) |
$ 3,000 |
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On December 31, 2016, Akron, Inc. purchased 5 Percent of Zip
Company's common shares on the...
On December 31, 2016, Akron, Inc. purchased 5 Percent of Zip Company's common shares on the...
On December 31, 2016, Akron, Inc. purchased 5 Percent of Zip Company's common shares on the open market in exchange for $16,800. On December 31, 2017, Akron, Inc., acquires an additional 25 percent of Zip Company's outstanding common stock for $96,250. During the next two years, the following information is available for Zip Company: Income Dividends Declared Common Stock Fair Value (12/31) 2016 $322,000 2017 $81,000 $6,300 385,000 2018 92,000 14,700 479,000 At December 31, 2017, Zip reports a net...
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