Question

Harper, Inc. acquires 40 percent of the outstanding voting stock of Kinman Company on January 1, 2017, for $276,500 in cash. The book value of Kinman's net assets on that date was $530,000, although one of the company's buildings, with a $71,600 carrying amount, was actually worth $122,850. This building had a 10-year remaining life. Kinman owned a royalty agreement with a 20-year remaining life that was undervalued by $110,000. Kinman sold inventory with an original cost of $52,500 to Harper during 2017 at a price of $75,000. Harper still held $15,900 (transfer price) of this amount in inventory as of December 31, 2017. These goods are to be sold to outside parties during 2018. Kinman reported a $58,200 net loss and a $29,900 other comprehensive loss for 2017. The company still manages to declare and pay a $11,000 cash dividend during the year. During 2018, Kinman reported a $44,600 net income and declared and paid a cash dividend of $13,000. It made additional inventory sales of $88,000 to Harper during the period. The original cost of the merchandise was $55,000. 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

Answer 1

Ans-Preparing Journal Entries for Harper for 2017 and 2018 in Connection with this Investment by assuming that Equity Method is applied:-

Date	Accounts Titles and Explanation	Debit ($)	Credit ($)
1/1/2017	Investment in Kinman Co.	276,500
	Cash		276,500
	(To record initial investment)
During 2017	Dividends Receivable	4,400
	Investment in Kinman Co		4,400
	(To record dividend declaration :$11,000*40%)
	Cash	4,400
	Dividends Receivable		4,400
	(To record receipt of dividend)
12/31/2017	Equity in Kinman Income- Loss ($58,200*40%)	23,280
	Other Comprehensive Loss of Kinman ($29,900*40%)	11,960
	Investment in Kinman Co.		35,240
	(To record accrual of income and OCI from equity investee, 40% of reported balances)
12/31/2017	Equity in Kinman Income-Loss	4,250
	Investment in Kinaman Co.		4,250
	(To record amortization relating to acquisition of Kinman-see Schedule 1 below)
12/31/2017	Equity in Kinman Income- Loss	1,908
	Investment in Kinman Co.		1,908
	(To defer unrealized gross profit on intra- entity Sale- see Schedule -2 below)
During 2018	Dividend Receivables	5,200
	Investment in Kinman Co.		5,200
	(To record dividend declaration ($13,000*40%)
	Cash	5,200
	Dividend Receivable		5,200
	(To record the receipt of dividend)
12/31/2018	Equity in Kinman Income	17,840
	Investment in Kinman Co.		17,840
	(To record the 40% accrual income as earned by equity investee $44,600*40%)
12/31.2018	Equity in Kinman Income	4,250
	Investment in Kinman Co.		4,250
	(To record the amortization relating to the Acquisition of Kinman)
12/31/2018	Investment In Kinman Co.	1,908
	Equity in Kinman Income		1,908
	(To record income deferred from 2017)
12/31/2018	Equity in Kinman Income	3,960
	Investment in Kinman Co.		3,960
	(To deferred Unrealized gross profit on Intra-equity sale- see Schedule-3 below)

Schedule-1 Allocation of Purchase Price and Related to Amortization:-

Purchase Price	$276,500
Less: Percentage of Book Value of Acquired ($530,000*40%)	($212,000)
Payment in Excess of Book Value	$64,500

	Remaining Life	Annual Amortization
Excess Payment Identified With Specific Assets:
Building ($122,850-$71,600= $51,250*40% =$20,500)	10 Years	$2,050
Royalty Agreement ($110,000*40%= $44,000)	20 Years	$2,200
Total Annual Amortization		$4,250

Schedule-2 Deferral of Unrealized Gross Profit- 2017:-

Inventory Remaining at the End of Year	$15,900
Gross Profit Percentage ($75,000-$52,500=$22,500/ $75,000)	30%
Gross Profit Remaining in Inventory	$4,770
Ownership Percentage	40%
Unrealized Gross Profit to be Deferred	$1,908

Schedule-3 Deferral of Unrealized Gross Profit- 2018

Inventory Remaining at the End of Year ($88,000*30%)	$26,400
Gross Profit Percentage ($88,000-$55,000=$33,000/ $88,000*100)	37.5%
Gross Profit Remaining in inventory	$9,900
Ownership Percentage	40%
Unrealized Gross Profit to be deferred	$3,960