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 book value of $292,000. 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?
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 book value of $292,000. 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
Answer
Ans- a- Allocation and annual amortization -12/31/2017:-
| Purchase price of 25% interest | $95,000 |
| Add:Carrying amount of 5% interest ($380,000*5%) | $19,000 |
| Total fair value of A's investment in Z accounts | $114,000 |
| Less:Net book value ($294,000*30%) | ($88,200) |
| Franchise agreements | $25,800 |
| Remaining life of franchise agreements | 10 years |
| Annual amortization ($25,800/ 10 years) | $2,580 |
a-1- Calculating Equity Income that should A report for 2018
| 2018 basic equity income accural ($94,000*30%) | $28,200 |
| Less:2018 amortization (above) | ($2,580) |
| Equity income 2018 | $25,620 |
a-2- On A's December 31,2018 balance sheet the amount of investment in Z account reported as follows:
| December 31,2017 total fair value | $114,000 |
| Add:2018 basic equity income (above) | $25,620 |
| Less: 2018 dividends ($14,800*30%) | ($4,440) |
| Investment in Z-December 31,2018 | $135,180 |
Ans-b-1- Assume A uses fair-value accounting for its investment in Z account:
Calculating amount of income from its investment in Z should A report for 2018
| Dividend income ($14,800*30%) | $4,440 |
| Add:Increase in fair value ($477,000-$380,000)*30% | $29,100 |
| Total report income from investment in Z | $33,540 |
b-2- On Akron;s December 31,2018 balance sheet amount of investment in Z as follows:
| Investment in Z ( $477,000*30%) | $143,100 |
Conclusion:-
| a-1- Equity income | $25,620 |
| a-2- Investments in Z account | $135,180 |
| b-1- Reported income | $33,540 |
| b-2-Investment in Z account | $143,100 |
On December 31, 2019, Akron, Inc., purchased 5 percent of Zip Company's common shares on the open market in exchange for $15,750. On December 31, 2020, Akron, Inc., acquires an additional 25 percent of Zip Company's outstanding common stock for $96,000.
During the next two years, the following information is available for Zip Company:
| Income | Dividends Declared | Common Stock Fair Value (12/31) |
|
| 2019 | $315,000 | ||
| 2020 | $84,000 | $6,500 | 384,000 |
| 2021 | 86,000 | 14,400 | 476,000 |
|
|
|||
At December 31, 2020, Zip reports a net book value of $300,000. 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, 2020.
Assume Akron applies the equity method to its Investment in Zip account:
What amount of equity income should Akron report for 2021?
On Akron’s December 31, 2021, 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 2021?
On Akron’s December 31, 2021, balance sheet, what amount is reported for the Investment in Zip account?
a.
Allocation and annual amortization—12/31/20
| Purchase price of 25% interest | $ | 96,000 | |
| Carrying amount of 5% interest (5% × $384,000) | 19,200 | ||
| Total fair value of Akron’s investment in Zip | 115,200 | ||
| Net book value ($300,000 × 30%) | (90,000 | ) | |
| Franchise agreements | $ | 25,200 | |
| Remaining life of franchise agreements | ÷ 10 | years | |
| Annual amortization | $ | 2,520 | |
|
|
|||
1.
Equity Income—2021
| 2021 basic equity income accrual ($86,000 × 30%) | $ | 25,800 | |
| 2021 amortization (above) | (2,520 | ) | |
| Equity income—2021 | $ | 23,280 | |
|
|
|||
2.
Investment in Zip account
| December 31, 2020 total fair value | $ | 115,200 | |
| 2021 basic equity income (above) | 23,280 | ||
| 2021 dividends ($14,400 × 30%) | (4,320 | ) | |
| Investment in Zip—December 31, 2021 | $ | 134,160 | |
|
|
|||
b.
1.
| Dividend income (30% × $14,400) | $ | 4,320 | ||
| Increase in fair value (30% × [$476,000 − $384,000]) | 27,600 | |||
| Total reported income from Investment in Zip | $ | 31,920 | ||
|
|
||||
2.
Investment in Zip (30% × $476,000) = $142,800
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