On December 31, 2016, Akron, Inc. purchased 5 Percent of Zip Company\'s common s
ID: 2338713 • Letter: O
Question
On December 31, 2016, Akron, Inc. purchased 5 Percent of Zip Company's common shares on the open market in exchange for $17,500. On December 31, 2017, Akron, Inc., acquires an additional 25 percent of Zip Company's outstanding common stock for $97,500 During the next two years, the following information is available for Zip Company: Common Stock Dividends Fair Value (12/31) $313,000 390,000 486, 000 Income Declared 2016 2017 $77,000 $7,500 2018 94,00014, 800 At December 31, 2017, Zip reports a net book value of $296,000. 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 a. Assume Akron applies the equity method to its Investment in Zip account: 1. What amount of equity income should Akron report for 2018? 2. On Akron's December 31, 2018, balance sheet, what amount is reported for the Investment in Zip account? b. Assume Akron uses fair-value accounting for its Investment in Zip account: 1. What amount of income from its investment in Zip should Akron report for 2018? 2. On Akron's December 31, 2018, balance sheet, what amount is reported for the Investment in Zip account? a1. Equity income a2. Investment in Zip account b1. Reported income b2. Investment in Zip accountExplanation / Answer
Under fair value method, investment valued at fair market value. And change in fair value considered as reported income.
Under equity method, share in net income considered as equity earnings. And investment should value at cost of acquisition of share + share in net income - dividend received -amortization of excess value + cost of additional acquired share.
30% share acquired (17500+97500)
115000
Less: share in book value (296000*30%)
88800
Excess value
26200
Useful life
10 years from Dec, 31 2017
Amortization per year (26200/10 years)
2620
Equity method
Equity income in 2018
Share in net income (94000*30%)
28200
Less: amortization per year
2620
Equity income in 2018
25580
Investment value at Dec, 31 2018
Investment value at Dec, 31 2016
17500
Add: share in net income (77000*5%)
3850
Less: dividend received (7500*5%)
375
ADD: 25% additional share acquired
97500
Investment value at Dec, 31 2017
118475
Investment value at Dec, 31 2017
118475
Add: share in net income (94000*30%)
28200
Less: dividend received (14800*30%)
4440
Less: Amortization of patent
2620
Investment value at Dec, 31 2018
139615
Fair value method
2017
2018
Fair value of Zip company at beginning of year
313000
390000
Fair value of Zip company at ending of year
390000
486000
Increase in fair value (fair value of Zip company at ending of year - fair value of Zip company at beginning of year)
77000
96000
% of share acquired
5%
30%
Reported income
3850
28800
Investment value in zip company in 2018 (486000*30%)
145800
Under fair value method, investment valued at fair market value. And change in fair value considered as reported income.
Under equity method, share in net income considered as equity earnings. And investment should value at cost of acquisition of share + share in net income - dividend received -amortization of excess value + cost of additional acquired share.
30% share acquired (17500+97500)
115000
Less: share in book value (296000*30%)
88800
Excess value
26200
Useful life
10 years from Dec, 31 2017
Amortization per year (26200/10 years)
2620
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