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

,Answer:

$23,910

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