Question

Harper, Inc. acquires 40 percent of the outstanding voting stock of Kinman Company on January 1, 2017, for $365,700 in cash. The book value of Kinman's net assets on that date was $760,000, although one of the company's buildings, with a $71,200 carrying amount, was actually worth $111,450. This building had a 10-year remaining life. Kinman owned a royalty agreement with a 20-year remaining life that was undervalued by $114,000. Kinman sold inventory with an original cost of $65,100 to Harper during 2017 at a price of $93,000. Harper still held $22,800 (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 $43,600 net loss and a $27,500 other comprehensive loss for 2017. The company still manages to declare and pay a $5,000 cash dividend during the year. During 2018, Kinman reported a $56,400 net income and declared and paid a cash dividend of $7,000. It made additional inventory sales of $74,000 to Harper during the period. The original cost of the merchandise was $46,250. 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.)

TRANSACTION LIST

• 1

  Record the initial investment.

• 2

  Record the dividend declaration.

• 3

  Record the receipt of dividend.

• 4

  Record the accrual of income and OCI from equity investee, 40% of reported balances.

• 5

  Record the amortization relating to acquisition of Kinman.

• 6

  Record the defer unrealized gross profit on intra-entity sale.

• 7

  Record the dividend declaration.

• 8

  Record the receipt of dividend.

• 9

  Record the 40% accrual of income as earned by equity investee.

• 10

  Record the amortization relating to acquisition of Kinman.

• 11

  Record the recognized income deferred from 2017.

• 12

  Record the deferred unrealized gross profit on intra-entity sale.

Answer 1

Working on Schedules as follows:

Allocation of the purchase price and related to Amortization:

Purchase Price	$365,700
Less: % of Book value of acquired [($111,450 - $71,200) × 40%]	($16,100)
Payment in Excess of book value	$349,600

	Remaining Life	Annual Amortization
Excess identified with specific Assets:
Building ($40250 × 40%) = $16100	10 years	$1,610
Royalty Agreement ($114,000 × 40%) = $45,600	20 years	$2,280
Total Annual Amortization		$3,890

________________________________________________________

2.

Deferral of Unrealized Gross profit -2017

Schedule 2
Inventory Remaining at the End of Year	$27,600
Gross profit % [($56400-$5000)/$93000]	55.56%
Gross profit remaining in inventory	$15,335
Ownership percentage	40%
Unrealized Gross profit to be deferred Until 2018	$6,134

_____________________________________________________________________

Deferral of Unrealized Gross profit -2018

Schedule 3
Inventory Remaining at the End of Year ($74,000*30%)	$22,200
Gross profit % [($56400-$5000)/$74,000]	69.45%
Gross profit remaining in inventory	$15,418
Ownership percentage	40%
Unrealized Gross profit to be deferred Until 2019	$6,167

_____________________________________________________________________

Date	General Journal	Debit	Credit
Jan. 01, 2017	Investment in Kinman Co.	$365,700
	Cash		$365,700
	(To record initial investment)
	Dividends receivable	$2,000
	Investment in Kinman Co. ($5,000*40%)		$2,000
	Cash	$2,000
	Dividends receivable		$2,000
Dec. 31, 2017	Equity in Kinman loss	$17,440
	Other comprehensive loss of kinman ($27500 × 40%)	$11,000
	Investment in Kinman Co. [($43600+$27500) × 40%]		$28,440
Dec. 31, 2017	Equity in kinman- Loss	$3,890
	Investment in Kinman Co. (See Schedule 1)		$3,890
Dec. 31, 2017	Equity in kinman- Loss	$6,134
	Investment in Kinman Co. (See Schedule 1)		$6,134
2018
	Dividends receivable	$2,800
	Investment in Kinman Co. ($7,000 × 40%)		$2,800
	Cash	$2,800
	Dividends receivable		$2,800
Dec. 31, 2018	Investment in Kinman Co.	$22,560
	Equity in kinman income ($56400 × 40%)		$22,560
Dec. 31, 2018	Equity in kinman income	$3,890
	Investment in Kinman Co. (See Amortization schedule)		$3,890
Dec. 31, 2018	Investment in Kinman Co.	$6,134
	Equity in kinman income (See schedule)		$6,134
Dec. 31, 2018	Equity in kinman income	$6,167
	Investment in Kinman Co. (See schedule)		$6,167