Question

Harper, Inc. acquires 40 percent of the outstanding voting stock of Kinman Company on January 1, 2017, for $320,500 in cash. The book value of Kinman's net assets on that date was $620,000, although one of the company's buildings, with a $78,400 carrying amount, was actually worth $133,650. This building had a 10-year remaining life. Kinman owned a royalty agreement with a 20-year remaining life that was undervalued by $126,000. Kinman sold inventory with an original cost of $79,800 to Harper during 2017 at a price of $114,000. Harper still held $20,550 (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 $56,400 net loss and a $22,200 other comprehensive loss for 2017. The company still manages to declare and pay a $30,000 cash dividend during the year. During 2018, Kinman reported a $61,000 net income and declared and paid a cash dividend of $32,000. It made additional inventory sales of $128,000 to Harper during the period. The original cost of the merchandise was $80,000. All but 30 percent of this inventory had been resold to outside parties by the end of the 2018 fiscal year. List the 12 required entries.

Answer 1

1. To record acquisition of interest
Date	Account Title	Debit	Credit
Jan.1, 2017	Investment in Kinman Co.	320500
	Cash		320500
2. To record acquisition of assets and liabilities
Date	Account Title	Debit	Credit
Jan.1, 2017	Net assets (405 of $620,000)	248000
	Buildings *	22100
	Royalty agreements **	50400
	Investment in Kinman Co.		320500
	Excess of fair value of buildings = $133,650-$78,400
		=55,250
	40% of this *	22100
	Undervaluation of royalty agreements = $126,000
	40% of this **	=50,400
3. To record equity income from Kinman co. For 2017
Date	Account Title	Debit	Credit
Dec.31, 2017	Equity income fromKinman Co. *	31440
	Investment in Kinman Co.		31440
	* 40% of ($56,400+22,200) = $ 31,440
4. To record dividend received from Kinman co. For 2017
Date	Account Title	Debit	Credit
Dec.31, 2017	Cash *	12000
	Investment in Kinman Co.		12000
	* 40% of $30,000 = $ 12,000
5. Amortization of excess fair value on buildings and royalty agreement
Date	Account Title	Debit	Credit
Dec.31, 2017	Amortization expenses *	4730
	Investment in Kinman Co.		4730
	Excess fair value for buildings	22100
	Remaining life	10	years
	Amortization of excess paid (A)	2210
	Exces fair value for royalty agreement	50400
	Remaining life	20	years
	Amortization of excess paid (B)	2520
	Total amortization expense (A + B) *	4730
6.Elimination of profit on intercompany transfer
Date	Account Title	Debit	Credit
Dec.31, 2017	Cost of goods sold *	6165
	Inventory		6165
	Sale value of goods transferred	114000
	Cost of these goods	79800
	Gross profit (114,000 - 79,800)	34200
	Gross profit margin	30%
	Ending inventory of transfer from Kinman = $ 20,550
	Gross proft on ending inventory	6165
7. Recording the unrealized profit from 2017 in 2018
Date	Account Title	Debit	Credit
Jan.1., 2018	Retained earnings - Harper. Inc. (40% of 6,165)	2466
	Retained earnings - Kinman Co. (60% of $6,165)	3699
	Cost of goods sold		6165
8. To record equity income from Kinman co. For 2018
Date	Account Title	Debit	Credit
Dec.31, 2018	Investment in Kinman Co.	24400
	Equity income from Kinman Co. *		24400
	* 40% of $61,000 = $ 24,400
9. To record dividend received from Kinman co. For 2018
Date	Account Title	Debit	Credit
Dec.31, 2018	Cash *	12800
	Investment in Kinman Co.		12800
	* 40% of $32,000 = $ 12,800
10. Amortization of excess fair value on buildings and royalty agreement in 2018
Date	Account Title	Debit	Credit
Dec.31, 2018	Amortization expenses *	4730
	Investment in Kinman Co.		4730
	Excess fair value for buildings	22100
	Remaining life	10	years
	Amortization of excess paid (A)	2210
	Exces fair value for royalty agreement	50400
	Remaining life	20	years
	Amortization of excess paid (B)	2520
	Total amortization expense (A + B) *	4730
11.Elimination of profit on intercompany transfer in 2018
Date	Account Title	Debit	Credit
Dec.31, 2018	Cost of goods sold *	14400
	Inventory		14400
	Sale value of goods transferred	128000
	Cost of these goods	80000
	Gross profit (114,000 - 79,800)	48000
	Gross profit margin	37.50%
	Ending inventory of transfer from Kinman = 30% of $128,000 = $ 38,400
	Gross proft on ending inventory *	14400
7. Recording the unrealized profit from 2018 in Jan.2019
Date	Account Title	Debit	Credit
Jan.1 , 2019	Retained earnings - Harper. Inc. (40% of 14,400)	5760
	Retained earnings - Kinman Co. (60% of $14,400)	8640
	Cost of goods sold		14400