On December 31, 2019, Akron, Inc., purchased 5 percent of Zip Company's common shares on the...

On December 31, 2019, Akron, Inc., purchased 5 percent of Zip Company's common shares on the open market in exchange for $17,100. On December 31, 2020, 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)
2019			$313,000
2020	$68,000	$6,600	380,000
2021	85,000	14,400	470,000

At December 31, 2020, Zip reports a net book value of $280,000. 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.

Assume Akron applies the equity method to its Investment in Zip account:

What amount of equity income should Akron report for 2021?
On Akron’s December 31, 2021, 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 2021?
On Akron’s December 31, 2021, balance sheet, what amount is reported for the Investment in Zip account?

Solutions

Expert Solution

Data in Question	Acron's book
Year	Stake	Cost	Income	Dividend	FV	Dividend	Income	Carrying Value
2019	5%	17100
2020	25%	95000	68000	6600	380000	330		16,770
2021			85000	14400	470000	4320	25500	132,950

Case: On 31st December 2019 Akron Inc. (“Akron”) purchased 5% shares of Zip Company (“Zip”) for Rs. 17,100/- hence the Company will book this on cost. On 31st December 2020 The Akron additionally acquired 25% stake of the Zip and Zip declared dividend of Rs. 6600/-. Akron is following “Equity Method” of Accounting.

The equity method of accounting should generally be used when an investment results in a 20% to 50% stake in another company, unless it can be clearly shown that the investment doesn't result in a significant amount of influence or control.

Under the equity method, the investment is initially recorded in the same way as the cost method. However, the amount is subsequently adjusted to account for your share of the company's profits and losses. Dividends are not treated as income under this method. Rather, they are considered a return of investment, and reduce the listed value of your shares.

Therefore the on 31st December 2020 only amount of Dividend will be reduced from the carrying value, however on 31st December 2021 Dividend will be deducted and proportionate income for the year will be recorded in books and added to Carrying Value to arrive at Fair Value as on 31st December 2021.

ekkarill92 answered 1 year ago

Next > < Previous

Related Solutions

On December 31, 2016, Akron, Inc. purchased 5 Percent of Zip Company's common shares on the...

On December 31, 2016, Akron, Inc. purchased 5 Percent of Zip Company's common shares on the open market in exchange for $15,500. 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 $325,000 2017 $82,000 $7,400 380,000 2018 94,000 14,800 477,000 At December 31, 2017, Zip reports a net...

On December 31, 2016, Akron, Inc. purchased 5% of Zip’s Company's common shares on the open...

On December 31, 2016, Akron, Inc. purchased 5% of Zip’s Company's common shares on the open market in exchange for $18,000. On December 31, 2017, Akron, Inc. acquires an additional 25% of Zip Company's outstanding common stock for $93,000. During the next two years, the following information is available for Zip Company: Net Income Dividends Declared Common Stock Fair Value (12/31) 2015 $268,000 2016 $55,200 $4,800 322,000 2017 69,000 6,000 372,000 2018 82,000 15,600 484,000 At December 31, 2017, Zip...

Celebrity Inc. has the following shares outstanding at December 31, 2019: Common shares, $1,500,000 no par...

Celebrity Inc. has the following shares outstanding at December 31, 2019: Common shares, $1,500,000 no par value, 10,000 shares issued and outstanding, unlimited number authorized. Preferred shares, $200,000, $5.00, no par value, non voting shares, 2,000 shares issued and outstanding. The preferred shares are cumulative and non-participating. Dividends have not been declared for the past two years. Dividends declared are $30,000. What is the total common share dividends?

Accounting: Celebrity Inc. has the following shares outstanding at December 31, 2019: Common shares, $1,500,000 no...

Accounting: Celebrity Inc. has the following shares outstanding at December 31, 2019: Common shares, $1,500,000 no par value, 10,000 shares issued and outstanding, unlimited number authorized. Preferred shares, $200,000, $5.00, no par value, non voting shares, 2,000 shares issued and outstanding. The preferred shares are noncumulative and non-participating. Dividends declared are $47,500. What is the total preferred share dividends? Celebrity Inc. has the following shares outstanding at December 31, 2019: Common shares, $1,500,000 no par value, 10,000 shares issued...

CarFind Inc. showed the following equity information at December 31, 2019. Common shares, unlimited shares authorized;...

CarFind Inc. showed the following equity information at December 31, 2019. Common shares, unlimited shares authorized; 5,500,000 shares issued and outstanding $ 1,010,000 Retained earnings 1,542,500 On April 1, 2020, 350,000 common shares were issued at $0.70 per share. On June 1, the board of directors declared a 15% share dividend to shareholders of record on June 15; the distribution date was July 1. The market prices of the shares on June 1, June 15, and July 1 were $2.98,...

On December 31, Year 5, Par Company purchased 70% of the outstanding common shares of Sub...

On December 31, Year 5, Par Company purchased 70% of the outstanding common shares of Sub Company for $8,750,000 million in cash. On that date, the shareholders’ equity of Sub consisted of $2 million in common shares and $6 million in retained earnings. For the year ended December 31, Year 10, the income statements for Par and Sub were as follows: Par Sub Sales $ 24,800,000 $ 12,000,000 Other Income 4,000,000 1,000,000 Cost of goods sold 18,000,000 8,200,000 Depreciation expense...

Crane Inc., a publicly traded company, had 291,000 common shares outstanding on December 31, 2019. During...

Crane Inc., a publicly traded company, had 291,000 common shares outstanding on December 31, 2019. During 2020, the company issued 6,600 shares on May 1 and retired 15,000 shares on October 31. For 2020, the company reported net income of $294,530 after a loss from discontinued operations of $44,000 (net of tax). Calculate earnings per share for 2020 as it should be reported to shareholders. (Round answer to 2 decimal places, e.g. 15.25.) Earnings per share Income per share before...

On December 31, 2017, Berclair Inc. had 560 million shares of common stock and 5 million...

On December 31, 2017, Berclair Inc. had 560 million shares of common stock and 5 million shares of 9%, $100 par value cumulative preferred stock issued and outstanding. On March 1, 2018, Berclair purchased 24 million shares of its common stock as treasury stock. Berclair issued a 5% common stock dividend on July 1, 2018. Four million treasury shares were sold on October 1. Net income for the year ended December 31, 2018, was $950 million. The income tax rate...

On December 31, 2017, Berclair Inc. had 400 million shares of common stock and 5 million...

On December 31, 2017, Berclair Inc. had 400 million shares of common stock and 5 million shares of 9%, $100 par value cumulative preferred stock issued and outstanding. On March 1, 2018, Berclair purchased 24 million shares of its common stock as treasury stock. Berclair issued a 5% common stock dividend on July 1, 2018. Four million treasury shares were sold on October 1. Net income for the year ended December 31, 2018, was $550 million. The income tax rate...

On December 31, 2017, Berclair Inc. had 320 million shares of common stock and 5 million...

On December 31, 2017, Berclair Inc. had 320 million shares of common stock and 5 million shares of 9%, $100 par value cumulative preferred stock issued and outstanding. On March 1, 2018, Berclair purchased 24 million shares of its common stock as treasury stock. Berclair issued a 5% common stock dividend on July 1, 2018. Four million treasury shares were sold on October 1. Net income for the year ended December 31, 2018, was $350 million. The income tax rate...

Subjects