On December 31 2016 Akron Inc purchased 5 of Zips Companys c

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?

Solution

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$