Question

Harper, Inc, acquires 40 percent of the outstanding voting stock of Kinma Company on January 1, 2017, for $228,600 in cash. The book value of Kinman's net assets on that date was $445,000, although one of the company's buildings, with a $71,000 carrying amount, was actually worth $112,000. This building had a 10-year remaining life. Kinman owned a roya agreement with a 20-year remaining life that was undervalued by $85,500. Kinman sold inventory with an original cost of $98,700 to Harper during 201 at a price of $141,000. Harper still held $15,750 (transfer price) of this amou in inventory as of December 31, 2017. These goods are to be sold to outside parties during 2018. Kinman reported a $59,400 net loss and a $23,200 other comprehensive loss for 2017. The company still manages to declare and pay a $23,000 cash dividend during the year. During 2018, Kinman reported a $49,000 net income and declared and paida cash dividend of $25,000. It made additional inventory sales of $108,000 to Harper during the period. The original cost of the merchandise was $67,500. All but 30 percent of this inventory had been resold to outside parties by the end of the 2018 fiscal year Prepare all journal entries for Harper for 2017 and 2018 in connection with this investment. Assume that the equity method is applied. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round intermediate calculations.) (Ctrl-

Answer 1

Solution:
Table 1

Building	Building	Royalty Agreement
Excess Amount (112000 - 71000)	41,000	85,500
Life	10yr	20yr
Amortization	4,100	4,275
40% Acquisition	1,640	1,710
Total	3,350

Table 2

Inventory	2017	2018
Remaining at year end	15,750	40,500
profit margin	30%=(141000-98700)/141000	52%=(141000-67500)/141000
unearned gross profit	4,725	21,060
40%Acquisition	1,890	8,424

Journal Entries:

Date	Particulars	Debit ($)	Credit ($)
01/01/2017	Investment in kinman	228,600
	cash		228,600
	(Investment recorded)
31/12/2017	Dividend receivable	9,200
	Investment in kinman Co		9,200
	(Dividend receivable 23000*40%)
31/12/2017	Cash	9,200
	Dividend receivable		9,200
	(Dividend received)
31/12/2017	Equity in Kinman loss	23,760
	Other comprehensive loss	9,280
	Investment in Kinman Co.		33,040
	(Recognised loss 59400*40% Other Comprehensive loss 23200*40%)
31/12/2017	Equity in Kinman(Amortization)	3,350
	Investment in Kinman Co.		3,350
	(Amortization as per table 1 Recorded)
31/12/2017	Equity in kinman Income	1,890
	Investment in kinman Co		1,890
	(Unrealised Profit recorded as per table 2 2017)
31/12/2018	Dividend receivable	10,000
	Investment in Kinman Co		10,000
	(Dividend receivable during 2018 recorded)
31/12/2018	Cash	10,000
	Dividend Receivable		10,000
	(Dividend for 2018 received is recorded)
31/12/2018	Investment in Kinman Co	19,600
	Equity in Kinman Co		19,600
	(Income for year 2018 is recorded 49000*40%)
31/12/2018	Equity in Kinman Co Inocme	3,350
	Investment In Kinman		3,350
	(Amortization as per table 1 is recorded for 2018)
31/12/2018	Investment in Kinman Co	1,890
	Equity in Kinman Income		1,890
	(Last years unrealised profit realised)
31/12/2018	Equity in Kinman Co	8,424
	Investment in Kinman		8,424
	(Unrealised profit of 2018 recorded as per table 2 2018)