Harper, Inc. acquires 40 percent of the outstanding voting stock of Kinman Compa

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.)

Explanation / Answer

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

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