Problem 1-26 (LO 1-1, 1-3, 1-4) On December 31, 2016, Akron, Inc. purchased 5 Pe

Question

Problem 1-26 (LO 1-1, 1-3, 1-4) On December 31, 2016, Akron, Inc. purchased 5 Percent of Zip Company's common shares on the open market in exchange for During the next two years, the following information is available for Zip Company S17,400. On December 31, 2017, Akron, Inc, acquires an additional 25 percent of Zip Company's outstanding common stock for $93,250 Dividends Fair Value 2016 2017$79,000 $7,169 2018 $326,000 373,809 481,800 96,860 15,380 At December 31, 2017, Zip reports a net book value of $299,000. 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 2Investment in 7ip account b1 Reported income b2 Investment in Zip account

Explanation / Answer

Part-A 1. Computation of Equity income that should Akron report for 2018 Equity income Accrual for 2018 ($96000*30%) $28,800 Less: Amortization ( W/Note-1) $2,220 Equity income in 2018 $26,580 2. Amount reported in Akron's Balance sheet on Dec 31,2018 for investment in Zip Total Fair Value on 31 Dec 2017 $111,900 Equity income for 2018 $26,580 Dividend for 2018 (15300*30%) -$4,590 Imnvestment in Zip as on Dec 31, 2018 $133,890 W/Note-1 Statement showing Allocation and Annual Amortization-31/12/2017 Particular Amount Purchase Price of 25% Interest $93,250 Carrying Amount of 5% Interest( $373000*5%) $18,650 Total Fair Value of A's Investment in Zip Account $111,900 Net Book Value ($299000X30%) $89,700 Franchisee Agreement $22,200 Remaining Life of Franchisee Agreement $10 Annual Amortization( $8212/10) $2,220 Part-B Assume Akron's Use Fair value Accounting 1. Computation of income from Investment in Zip reported for 2018 Dividend Income ( $15300*30%) $4,590 Increase in Fair value ($481000-$373000)*30% $32,400 Total Income from Zip report by Akron's $36,990 2. Amount reported in Akron 's Balance sheet on Dec 31,2018 for investment in Zip Investment in Zip ($481000*30%) $144,300 a.1 Equity income $26,580 a.2. Investment in Zip Account $133,890 b. 1 Reported Income $36,990 b2. Investment in Zip Account $144,300

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