In: Accounting
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 reports a net book value of $283,000. Akron attributed any excess of its 30% 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. a. Using the appropriate accounting method, prepare all of the journal entries for Akron, Inc. regarding their investment in Zip stock for 2016. b. What is the balance in the Investment in Zip Company account on December 31, 2016? c. How much of Akron Inc.'s consideration for Zip's stock on December 31, 2017 is attributable to revaluation increments and decrements, goodwill or gain on bargain purchase?
on 31/12/2016
as on date of purchase
5% purchased for - $18000
less: dividend received - $240 (4800*5%)
net cost to akron - $17760
Fair value as on that date (100%) - $ 322000
5% fair value - $16100
entries in akron on 2016
investment in zip shares a/c dr $18000
to cash a/c $18000
cash a/c dr $ 240
to dividend received a/c $240
dividend received a/c dr $240
to investment in shares a/c $ 240
2017
purchased 25% shares for $93000
less:- dividend for 25% $1500 (25% of 6000)
net cost for 25% - $91500
net cost for 5% -$17760
total cost incurred - $109260
entries
investment in zip shares a/c dr $93000
to cash a/c $93000
cash a/c dr $ 1800
to dividend received a/c $1800
dividend received a/c dr $1800
to investment in shares a/c (25%) $ 1500
to P/L a/c (5%) $300
book value as on 31/12/17 - $283000
book value for 30% - $84900
fair value for 30% - $111600
difference is to be recongnised as goodwill - $26700
since the agreement is for 10years every year the amount of goodwill to be debited to P/L is 2670$