Question

5 Harper, Inc. acquires 40 percent of the outstanding voting stock of Kinman Company on January 1, 2017, for $345,900 in cash. The book value of Kinman's net assets on that date was $675,000, although one of the company's buildings, with a $63,600 carrying amount, was actually worth $125,850. This building had a 10-year remaining life. Kinman owned a royalty agreement with a 20-year remaining life that was undervalued by $127,500. 0.71 Kinman sold inventory with an original cost of $69,300 to Harper during 2017 at a price of $99,000. Harper still held $19,800 (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 $55,000 net loss and a $21,000 other comprehensive loss for 2017. The company still manages to declare and pay a $7,000 cash dividend during the year. eBook During 2018, Kinman reported a $45,800 net income and declared and paid a cash dividend of $9,000. It made additional inventory sales of $84,000 to Harper during the period. The original cost of the merchandise was $52,500. 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. rences(If no entry Is requlred for a transactlon/event, select "No Journal entry requlred" In the first account fleld. Do not round Intermedlete calculatlons.) View transaction list Journal entry worksheet 4 5 6 7 12 8 12 Record the amortization relating to acquisition of Kinman. Note: Enter debits before credits. Date General Journal Debit 12/31/2017 in Kinman income nvestment in Kinman Co Record entry Clear entry View general journal

Answer 1

12/31/2017 Equity in Kinman Income - Loss $5,040

Investment in Kinman Co $5,040

(To record amortization relating to acquisition Of Kinman - see W#1 below)

12/31/2017 Equity in Kinman Income-Loss $2,376

Investment in Kinman Co $2,376

(To defer unrealized gross profit on intra-entity Sale - see W#2 below)

12/31/2018 Equity in Kinman Income $5040

Investment in Kinman Co $5,040

(To record the amortization relating to the Acquisition of Kinman)   

12/31/2018 Investment in Kinman Co $2,376

Equity in Kinman Income $2,376

(To recognize income deferred from 2017)   

12/31/2018 Equity in Kinman Income $8820

Investment in Kinman Co $8820

(To deferred Unrealized gross profit on intra-entity sale - See W#3 below)

W#1) Computation of annual amortization : Remaining Life Annual Amortization Excess Payment Identified With Specific Assets: Building ($62,250 * 40%)-$24900 Royalty Agreement ($127,500 * 40%)-$51,000 Total Annual Amortization $2,490 $2,550 $5,040 10 Years 20 Years W#2) Deferral of Unrealized Gross Profit-2017: Inventory Remaining at the End of Year Gross Profit Percentage ($29,700/$99000) Gross Profit remaining in Inventory(19800+30%) Ownership Percentage Unrealized Gross Profit to be deferred Until 2018 $19,800 30.00% $5,940 40% $2,376 W#3Deferral of Unrealized Gross Profit-2018: Inventory Remaining at the End of Year Gross Profit Percentage ($31,500/$84,000) Gross Profit remaining in Inventory Ownership Percentage Unrealized Gross Profit to be deferred Until 2019 $58,800 37.50% $22,050 40% $8,820

W#1) Computation of annual amortization : Remaining Life Annual Amortization Excess Payment Identified With Specific Assets: Building ($62,250 * 40%) $24900 Royalty Agreement ($127,500 * 40%)-$51,000 Total Annual Amortization $2,490 $2,550 $5,040 10 Years 20 Years W#2) Deferral of Unrealized Gross Profit-2017 Inventory Remaining at the End of Year Gross Profit Percentage ($29,700/$99000) Gross Profit remaining in Inventory(19800*30%) Ownership Percentage Unrealized Gross Profit to be deferred Until 2018 $19,800 30.00% $5,940 40% $2,376 W#3Deferral of Unrealized Gross Profit-2018: Inventory Remaining at the End of Year Gross Profit Percentage ($31,500/$84,000) Gross Profit remaining in Inventory Ownership Percentage Unrealized Gross Profit to be deferred Until 2019 $31,200 37.50% $11,700 40% $4,680