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On December 31, 2016, Akron, Inc. purchased 5 Percent of Zip’s Company's common shares on the open market in exchange for $16,000. On December 31, 2017, Akron, Inc., acquires an additional 25 percent of Zip Company's outstanding common stock for $95,000.During the next two years, the following information is available for Zip Company:  IncomeDividends DeclaredCommon StockFair Value (12/31)2016  $320,0002017$75,000$7,000380,000201888,00015,000480,000  At December 31, 2017, Zip reports a net book value of $290,000. 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?

Question

On December 31, 2016, Akron, Inc. purchased 5 Percent of Zip’s Company's common shares on the open market in exchange for $16,000. On December 31, 2017, Akron, Inc., acquires an additional 25 percent of Zip Company's outstanding common stock for $95,000.

During the next two years, the following information is available for Zip Company:

 

  Income Dividends Declared Common Stock
Fair Value (12/31)
2016     $320,000
2017 $75,000 $7,000 380,000
2018 88,000 15,000 480,000
 

 

At December 31, 2017, Zip reports a net book value of $290,000. 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.

 

  1. 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?

 

  1. 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?
check_circleAnswer
Step 1

Given Information:

Fair Value
Date of
% shares
Profit
Dividends
of Common
acquired
Acquisition
Cost
earned
declared
Stock
31-12-2016
5%
16000
320000
31-12-2017
7000
25%
95000
75000
380000
31-12-2018
88000
15000
480000
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Image Transcriptionclose

Fair Value Date of % shares Profit Dividends of Common acquired Acquisition Cost earned declared Stock 31-12-2016 5% 16000 320000 31-12-2017 7000 25% 95000 75000 380000 31-12-2018 88000 15000 480000

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Step 2

Under the Equity Method of Valuation of Investment

Under the equity method, the income earned on the investment is reported in the Income statement of the Investor. Investor books his/her portioning of investee’s income or losses in his/her income statement and updates the investment’s book value accordingly.

Note: The va...

Under the Equity Method
Amount in
Date
Particulars
Computation
31-12-
Cost of Investment
16000
2016
31-12-
2017 Dividends Received
-350 (7000*5%)
31-12-
2017 Carrying value
31-12- Additional
2018 Acquisition
Share of Income
15650
95000
26400 (88000*30%)
-4500 (15000*30%)
Dividends Received
31-12
2018 Carrying value
132550
Therefore, the income to be reported in the income statement of Akron for 2018 is $26,400
31-12-2018 is $132,550
The carrying value of the investment as on
help_outline

Image Transcriptionclose

Under the Equity Method Amount in Date Particulars Computation 31-12- Cost of Investment 16000 2016 31-12- 2017 Dividends Received -350 (7000*5%) 31-12- 2017 Carrying value 31-12- Additional 2018 Acquisition Share of Income 15650 95000 26400 (88000*30%) -4500 (15000*30%) Dividends Received 31-12 2018 Carrying value 132550 Therefore, the income to be reported in the income statement of Akron for 2018 is $26,400 31-12-2018 is $132,550 The carrying value of the investment as on

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