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Harper, Inc. acquires 40 percent of the outstanding voting stock of Kinman Company on January 1,...

Harper, Inc. acquires 40 percent of the outstanding voting stock of Kinman Company on January 1, 2017, for $334,900 in cash. The book value of Kinman's net assets on that date was $625,000, although one of the company's buildings, with a $70,800 carrying amount, was actually worth $135,550. This building had a 10-year remaining life. Kinman owned a royalty agreement with a 20-year remaining life that was undervalued by $147,500. Kinman sold inventory with an original cost of $77,700 to Harper during 2017 at a price of $111,000. Harper still held $18,750 (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 $51,800 net loss and a $26,600 other comprehensive loss for 2017. The company still manages to declare and pay a $15,000 cash dividend during the year. During 2018, Kinman reported a $57,200 net income and declared and paid a cash dividend of $17,000. It made additional inventory sales of $120,000 to Harper during the period. The original cost of the merchandise was $75,000. 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.

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Journal entries for 2017
Date Accounts Titles & Explanation Debit Credit
01-Jan-17 Investment in kinman company $334,900
Cash $334,900
(recording investment)
31-Dec-17 Stock reserve $5,625
Inventory $5,625
$18,750 - ($77,700 x $18,750/$111,000)
(recording stock reserve)
31-Dec-17 Loss on investment in stokes company $20,720
Investment in kinman company $20,720
(recording loss in subsidiary) ($51,800 x 40%)
31-Dec-17 Cash $6,000
Investment in kinman company $6,000
(recording dividend received) ($15,000 x 40%)
Journal entries for 2018
31-Dec-17 Stock reserve $13,500
Inventory $13,500
$36,000 - ($75,000x$36,000/$120,000)
(recording stock reserve)
31-Dec-17 Loss on investment in stokes company $22,880
Investment in kinman company $22,880
(recording loss in subsidiary) ($57,200 x 40%)
31-Dec-17 Cash $6,800
Investment in kinman company $6,800
(recording dividend received) ($17,000 x 40%)

ekkarill92 answered 1 year ago
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