Question

On December 31, 2016, Akron, Inc. purchased 5 Percent of Zip Company's common shares on the open market in exchange for $16,600. 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: IncomeDividends DeclaredCommon StockFair Value (12/31)2016 $315,0002017$70,000$6,700390,000201890,00014,500472,000 At December 31, 2017, Zip reports a net book value of $287,000. 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

Answer 1

Akron should report a 2018 equity income of $24,200, which is calculated from their 30% share of Zip Company's net income minus the amortization of the franchise agreement's fair value excess.

Step-by-step explanation:

To calculate the equity income that Akron should report for 2018, we need to consider Akron's share of Zip's net income and the amortization of the franchise agreement's fair value excess.

First, Akron owns 30% of Zip Company. For 2018, Zip reported an income of $90,000. Akron's share is $90,000 × 0.30 = $27,000.

Next, any excess purchase price over the book value attributable to the franchise agreements is amortized over their remaining life. At the end of 2017, Zip's net book value was reported as $287,000. Akron purchased 25% of the company for $97,500, which when added to Akron's existing investment at $16,600 (5%), totals $114,100 for a 30% stake. The difference between Akron's 30% share of net book value ($287,000 × 0.30 = $86,100) and what Akron paid ($114,100) is $28,000. This is allocated to the franchises with a 10-year life which means the annual amortization is $28,000 ÷ 10 years = $2,800.

Akron must reduce their equity income by this amortization. Thus, Akron's equity income reported for 2018 is $27,000 - $2,800 = $24,200.

Answer 2

,Answer:

$23,910

Step-by-step explanation:

The computation of the amount of equity income should Akron report for 2018 is given below:

But before that the amortization is

Purchase price $97,500

carrying value ($390,000 ×5%) $19,500

Total fair value $117,000

Less: net book value ($287,000 × 0.30) $86,100

Franchise agreement $30,900

Divided by Remaining life 10

annual amortization $3,090

Now the amount of equity income is

= $90,000 ×30% - $3,090

= $23,910