On December 31, 2019, Akron, Inc., purchased 5 percent of Zip Company's common shares on the open market in exchange for $15,650. On December 31, 2020, Akron, Inc., acquires an additional 25 percent of Zip Company's outstanding common stock for $96,000. During the next two years, the following information is available for Zip Company: Common Stock
On December 31, 2019, Akron, Inc., purchased 5 percent of Zip Company's common shares on the open market in exchange for $15,650. On December 31, 2020, Akron, Inc., acquires an additional 25 percent of Zip Company's outstanding common stock for $96,000. During the next two years, the following information is available for Zip Company: Common Stock
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:On December 31, 2019, Akron, Inc., purchased 5 percent of Zip Company's common shares on the open market in exchange for
$15,650. On December 31, 2020, Akron, Inc., acquires an additional 25 percent Zip Company's outstanding common stock for
$96,000.
During the next two years, the following information is available for Zip Company:
Common Stock
Fair Value
2019
2020
2021
Income
Dividends
Declared
$76,000
$6,100
97,000 16,000
At December 31, 2020, 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,
2020.
(12/31)
$313,000
384,000
477,000
a. Assume Akron applies the equity method to its Investment in Zip account:
1. What amount of equity income should Akron report for 2021?
2. On Akron's December 31, 2021, 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 2021?
2. On Akron's December 31, 2021, 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 account
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Step 1: Explain the concept 'Equity Method':
VIEWStep 2: (a-1) Determine the amount of equity income should Akron report for 2021 under Equity Method:
VIEWStep 3: (a-2) Determine the amount reported for Investment in Zip account on Akron’s Dec 31, 2021:
VIEWStep 4: (b-1) Determine the amount of equity income should Akron report for 2021 under Fair Value Method:
VIEWStep 5: (b-2) Determine the amount reported for Investment in Zip account on Akron’s Dec 31, 2021:
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