Question

Harper, Inc. acquires 40 percent of the outstanding voting stock of Kinman Company on January 1, 2017, for $417,800 in cash. The book value of Kinman's net assets on that date was $855,000, although one of the company's buildings, with a $77,400 carrying amount, was actually worth $138,900. This building had a 10-year remaining life. Kinman owned a royalty agreement with a 20-year remaining life that was undervalued by $128,000. Kinman sold inventory with an original cost of $98,700 to Harper during 2017 at a price of $141,000. Harper still held $24,750 (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 $49,400 net loss and a $29,600 other comprehensive loss for 2017. The company still manages to declare and pay a $8,000 cash dividend during the year. During 2018, Kinman reported a $51,600 net income and declared and paid a cash dividend of $10,000. It made additional inventory sales of $78,000 to Harper during the period. The original cost of the merchandise was $48,750. 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.)

Answer 1

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Investment in Kinman Co.	$                                            417,800
Cash		$     417,800
(To record initial investment)
Dividends Receivable	$                                                3,200
Investment in Kinman Co.		$          3,200
(To record dividend declaration: $8,000 x 40%)
Cash	$                                                3,200
Dividends Receivable		$          3,200
(To record receipt of dividend)
Equity in Kinman Income	$                                              19,760
Other Comprehensive Loss of Kinman	$                                              11,840
Investment in Kinman Co.		$       31,600
(To record accrual of income and OCI from equity investee, 40% of reported balances)
Equity in Kinman Income	$                                                5,020
Investment in Kinman Co.		$          5,020
(To record amortization relating to acquisition ) (Shchedule -1)
Investment in Kinman Co.	$                                                2,970
Equity in Kinman Income		$          2,970
(To defer Harper’s share of gross profit on intra-entity sale, Schedule 2 below)
Dividends Receivable	$                                                4,000
Investment in Kinman Co.		$          4,000
(To record dividend declaration: $10,000 x 40%)
Cash	$                                                4,000
Dividends Receivable.		$          4,000
(To record receipt of dividend)
Investment in Kinman Co.	$                                              20,640
Equity in Kinman Income		$       20,640
(To record 40% accrual of income as earned by equity investee) $51,600*40%
Equity in Kinman Income	$                                                5,020
Investment in Kinman Co.		$          5,020
(To record amortization relating to acquisition of Kinman)
Investment in Kinman Co.	$                                                2,970
Equity in Kinman Income		$          2,970
(To recognize income deferred from 2017)
Equity in Kinman Income	$                                                3,510
Investment in Kinman Co.		$          3,510
(To defer Harper’s share of gross profit on intra-entity sale—Schedule 3 below)
Schedule 1—Allocation of Purchase Price and Related Amortization
Purchase price		$     417,800
Percentage of book value acquired	$855,000*40%	$   (342,000)
Payment in excess of book value		$       75,800
Excess payment identified with specific assets:			Life	Amortization
Building	($138,900-$77,400)*40%	$       24,600	10 yrs.	$                   2,460
Royalty agreement	$128,000*40%	$       51,200	20 yrs.	$                   2,560
Total annual amortization				$                   5,020
Schedule 2—Deferral of Intra-entity Gross Profit—2017
Inventory remaining at end of year		$       24,750
Gross profit percentage	$42,300/$141,000	30.00%
Gross profit remaining in inventory		$          7,425
Ownership percentage		40%
Intra-entity gross profit to be deferred until 2018		$          2,970
Schedule 3—Deferral of Intra-entity Gross Profit—2018
Inventory remaining at end of year (30%)	$78,000*30%	$       23,400
Gross profit percentage	$29,250/$78,000	37.50%
Gross profit remaining in inventory		$          8,775
Ownership percentage		40%
		$          3,510