On December 31, 2016, Akron, Inc. purchased 5 Percent of Zip Company\'s common s
ID: 2595858 • 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 $17,400. On December 31, 2017, Akron, Inc., acquires an additional 25 percent of Zip Company's outstanding common stock for $93,500.
During the next two years, the following information is available for Zip Company:
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:
a1. What amount of equity income should Akron report for 2018?
a2. 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:
b1. What amount of income from its investment in Zip should Akron report for 2018?
b2. On Akron's December 31, 2018, balance sheet, what amount is reported for the Investment in Zip account?
Income Dividends Declared Common StockFair Value (12/31) 2016 $317,000 2017 $82,000 $6,800 374,000 2018 95,000 14,600 474,000
Explanation / Answer
Allocation and annual amortization - 31-12-17
Fair Value of 5% interest = 5% x 374,000 = 18,700
Fair Value of 25% interest (given)
Total fair value of Akron’s investment in Zip Net book value acquired = 292,000 x 30% = 87,600
Aquisition cost = 93,500
Franchise agreements Remaining life of franchise agreements = 10 years
Annual excess fair value amortization
(18,700 + 93,500 - 87,600) / 10 years = 24,600 / 10 = 2,460
EQUITY METHOD
1. Equity income—2018
basic equity income accrual (95,000 x 30%)= 28,500
Less - 2018 amortization Equity income = 2,460
Equity income—2018 = $ 26,040
2. Investment in Zip account December 31, 2018
2018 dividends = 14,600 x 30% = 4,380
Investment showing in Zip account = 93,500 + 18,700 + 26,040 - 4380 = 133,860
FAIR VALUE ACCOUNTING
1. Divident Income = 30% x 14,600 = 4,380
Increase in fair value = 30% x (474,000 - 374,000) = 30,000
Divident Income = 34,380
2. Investment in Zip = 30% x 474,000 = 142,200
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