Question

Harper, Inc. acquires 40 percent of the outstanding voting stock of Kinman 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 royalty 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 2017 at a price of $141,000. Harper still held $15,750 (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 $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 paid a 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.)

Please help me to calculate the last (12) Journal entry.

Answer is complete but not entirely correct Date General Journal Debit Credit 01/01/2017 Investment in Kinman Co 228,600 Cash 228,600 12/31/2017 Dividends receivable 9,200 Investment in Kinman Co 9,200 12/31/2017 Cash 9,200 Dividends receivable 9,200 23,760 9,280 4 12/31/2017 Equity in Kinman income Other comprehensive loss of Kinman Investment in Kinman Co 33,040 12/31/2017 Equity in Kinman income 3,350 Investment in Kinman Co 3,350 12/31/2017 Equity in Kinman income 1,890 Investment in Kinman Co 1,890 12/31/2018 Dividends receivable 10,000 Investment in Kinman Co 10,000 12/31/2018 Cash 10,000 Dividends receivable 10,000 12/31/2018 Investment in Kinman Co 19,600 Equity in Kinman income 19,600

Answer 1

The answer is $4860 & not $8424.

Profit on entire additional sales made during the year is $108000 - $67500 = $ 40500.

Therefore, Gross Profit Margin = $40500 / $108000 = 37.5%

Now, 30% of this inventory had been resold to outside parties by the end of the year, that means profit for such inventory is being recorded twice.

Hence provision for such profit = ($108000*30%)* Gross Profit Margin = $32400*37.5% = $12150

As ownership of Harper in the company is 40%, the amount of unrealised gain to be recorded in his books will be

$12150*40% i.e. $4860 .