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.)

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) x 40%] ($16,100) Payment in Excess of book value $349,600

Remaining Life Annual Amortization Excess identified with specific Assets: Building ($40250 x 40%) = $16100 10 years $1,610 Royalty Agreement ($114,000 x 40%) = $45,600 20 years $2,280 Total Annual Amortization $3,890 - - - - - - - - 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 (574,000*30%) $22,200 Gross profit % [($56400-55000)/$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 x 40%) $11,000 Investment in Kinman Co. [($43600+$27500) x 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 x 40%) $2,800 Cash $2,800 Dividends receivable $2,800

Dec 31, 2018 Investment in Kinman Co. $22,560 Equity in kinman income ($56400 x 4096) $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