Question

Harper,  Inc. acquires 40 percent of the outstanding voting stock of Kinman Company on January 1, 2017, for $242,500 in cash. The book value of Kinman's net assets on that date was $425,000, although one of the company's buildings, with a $62,800 carrying amount, was actually worth $119,050. This building had a 10-year remaining life. Kinman owned a royalty agreement with a 20-year remaining life that was undervalued by $125,000.

Kinman sold inventory with an original cost of $37,800 to Harper during 2017 at a price of $54,000. Harper still held $23,550 (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 $44,200 net loss and a $23,100 other comprehensive loss for 2017. The company still manages to declare and pay a $16,000 cash dividend during the year.

During 2018, Kinman reported a $58,600 net income and declared and paid a cash dividend of $18,000. It made additional inventory sales of $122,000 to Harper during the period. The original cost of the merchandise was $76,250. 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

2017
Date	Account Details	Debit	Credit
Jan 1, 2017	Investment in kinnman Co.	$242,500
	Cash		$242,500
	(To record initial investment)
During 2017	Dividends receivable	$6,400
	Investment in kinnman Co.		$6,400
	To record the declared dividend
During 2017	Cash ($16,000 x 40%)	$6,400
	Dividend receivable		$6,400
	(To record receipt of dividend)
Dec 31, 2017	Equity in Kinnman Income—Loss ($44,200 x 40%)	$17,680
	Extraordinary Loss of Kinnman ($23,100 x 40%)	$9,240
	Investment in kinnman Co.		$26,920
	(To record accrual of income as earned by equity investee, 40% of reported balances)
Dec 31, 2017	Equity in Kinnman Income—Loss	$4,750
	Investment in kinnman Co.		$4,750
	(To record amortization relating to acquisition of Stokes— Schedule 1 )
Dec 31, 2017	Equity in Kinnman Income—Loss	$2,826
	Investment in kinnman Co.		$2,826
	(To defer unrealized gain on intra-entity sale - Schedule 2 )
During 2018	Dividends receivable	$7,200
	Investment in kinnman Co.		$7,200
	To record the declared dividend
During 2018	Cash ($18,000 x 40%)	$7,200
	Dividend Receivables		$7,200
	(To record receipt of dividend)
Dec 31, 2018	Investment in kinnman Co. ($58,600 x 40%)	$23,440
	Equity in Kinnman Income		$23,440
	(To record 40% accrual of income as earned by equity investee)
Dec 31, 2018	Equity in Kinnman Income	$3,300
	Investment in kinnman Co.		$3,300
	(To record amortization relating to acquisition of Stokes
Dec 31, 2018	Investment in kinnman Co. ($40,000 x 40%)	$2,826
	Equity in Kinnman Income		$2,826
	(To recognize income deferred from 2017)
Dec 31, 2018	Equity in Kinnman Income	$5,490
	Investment in kinnman Co.		$5,490
	(To defer unrealized gain on intra-entity sale (Schedule 3 )
Schedule 1	Allocation of Purchase Price and Related Amortization
	Purchase price	$242,500
	Percentage of book value acquired ($425,000 × 40%).	-$170,000
	Payment in excess of book value	$72,500
	Excess payment identified with specific assets	Life	Annual Amortization
Building ($119,050 - 62,800) = $56,250 x 40%	$22,500.00	10	$2,250
Royalty agreement ($125,000 × 40%)	$50,000.00	20	$2,500
	Total annual amortization		$4,750
Schedule 2	Deferral of Unrealized Gain—2017
Inventory remaining at end of year	$23,550
Gross profit percentage ($54,000 -$37800) ÷ $54,000)	30.00%
Gross profit remaining in inventory(23550 x 30%)	$7,065
Ownership percentage	40.00%
Unrealized gain to be deferred until 2018	$2,826
Schedule 3	Deferral of Unrealized Gain—2018
Inventory remaining at end of year (122,000 x 30%)	$36,600
Gross profit percentage ($122,000 - $76,250) ÷ $122,000)	37.50%
Gross profit remaining in inventory(36,600 x 37.50%)	$13,725
Ownership percentage	40.00%
Unrealized gain to be deferred until 2018	$5,490
Gross profit 2017 = $54,000 -$37,800	$16,200
Gross profit 2018 = $122,000 -$76250	$45,750