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Harper, Inc. acquires 40 percent of the outstanding voting stock of Kinman Company on January 1,...

Harper, Inc. acquires 40 percent of the outstanding voting stock of Kinman Company on January 1, 2017, for $243,700 in cash. The book value of Kinman's net assets on that date was $460,000, although one of the company's buildings, with a $74,200 carrying amount, was actually worth $118,450. This building had a 10-year remaining life. Kinman owned a royalty agreement with a 20-year remaining life that was undervalued by $105,000. Kinman sold inventory with an original cost of $126,000 to Harper during 2017 at a price of $180,000. Harper still held $20,400 (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 $50,600 net loss and a $28,300 other comprehensive loss for 2017. The company still manages to declare and pay a $18,000 cash dividend during the year. During 2018, Kinman reported a $57,800 net income and declared and paid a cash dividend of $20,000. It made additional inventory sales of $134,000 to Harper during the period. The original cost of the merchandise was $83,750. All but 30 percent of this inventory had been resold to outside parties by the end of the 2018 fiscal year.

1. 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.)

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Answer #1
Date Account titles debit credit
01-01-17 Investment in Kinman Co, 243700
Cash 243700
During 2017 Dividends receivable 7200
   Investment in Kinman Co, 7200
(0.4*18000)
Cash 7200
Dividends receivable 7200
31-12-17 Equity in Kinman Income-Loss(50600*40%) 20240
Other comprehensive loss of Kinman(28300*40%) 11320
   Investment in Kinman Co, 31560
31-12-17 Equity in Kinman Income 3870
   Investment in Kinman Co, 3870
(amortization)
31-12-17 Equity in Kinman Income-Loss 2448
   Investment in Kinman Co, 2448
(Unrealised gain on inventory)
During 2018 Dividends receivable 8000
   Investment in Kinman Co, 8000
(0.4*20000)
Cash 8000
Dividends receivable 8000
31-12-18 Investment in Kinman Co 23120
    Equity in Kinman Income 23120
(57800*40%)
31-12-18 Equity in Kinman Income 3870
   Investment in Kinman Co, 3870
(amortization)
31-12-18 Investment in Kinman Co 2448
    Equity in Kinman Income 2448
(recognise inventory gain deferral)
31-12-18 Equity in Kinman Income-Loss 6030
   Investment in Kinman Co, 6030
(Unrealised gain on inventory)

working:

Purchase Price 243700
Book value acquired 184000
Payment in excess of book value 59700
allocated to Life Annual amortization
Building 17700 10 1770
Royalty agreement 42000 20 2100
3870
Schedule 2
Inventory-2017
Inventory at end of year 20400
Gross profit percentage 30%
Gross profit remaining in inventory 6120
Ownership percentage 40%
Unrealised gross profit-deferral 2448
Schedule 3
Inventory-2018
Inventory at end of year 40200
Gross profit percentage 38%
Gross profit remaining in inventory 15075
Ownership percentage 40%
Unrealised gross profit-deferral 6030
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