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.)

1. Record the initial investment
2. Record the dividend declaration
3. Record the receipt of dividend
4. Record the accrual of income and OCI from equity investee, 40% of reported balances
5. Record the amortization relating to acquisition of Kinman
6. Record the defer unrealized gross profit on intra-entity sale
7. Record the dividend declaration
8. Record the receipt of dividend
9. Record the 40% accrual of income as earned by equity investee
10. Record the amortization relating to acquisition of Kinman
11. Record the recognized income deferred from 2017
12. Record the deferred unrealized gross profit on intra-entity sale

Answer 1

Date	General Journal	Debit	Credit
1/1/2017	Investment in Kinman Co	$242,500
	Cash		$242,500
	(To record initial investment)
During 2017	Dividends Receivable	$6400
	Investment in Kinman Co		$6400
	(To record dividend declaration: $16,000 * 40%)
	Cash	$6400
	Dividends Receivable		$6400
	(To record receipt of dividend)
12/31/2017	Equity in Kinman Income - Loss(44200*40%)	$17680
	Other Comprehensive Loss of Kinman(23100*40%)	$9240
	Investment in Kinman Co		$26920
	(To record accrual of income and OCI from equity investee, 40% of reported balances)
12/31/2017	Equity in Kinman Income - Loss	$4590
	Investment in Kinman Co		$4590
	(To record amortization relating to acquisition Of Kinman - see Schedule 1 below)
12/31/2017	Equity in Kinman Income-Loss	$2826
	Investment in Kinman Co		$2826
	(To defer unrealized gross profit on intra-entity Sale - see Schedule 1 below)
During 2018	Dividends Receivable	$7200
	Investment in Kinman Co		$7200
	(To record dividend declaration: $18000 * 40%)
	Cash	$7200
	Dividends Receivable		$7200
	(To record receipt of dividend)
12/31/2018	Investment in Kinman Co	$23440
	Equity in Kinman Income		$23440
	(To reccord the 40% accrual income as earned by equity investee(58600*40%))
12/31/2018	Equity in Kinman Income	$4590
	Investment in Kinman Co		$4590
	(To record the amortization relating to the Acquisition of Kinman)
12/31/2018	Investment in Kinman Co	$2826
	Equity in Kinman Income		$2826
	(To recognize income deferred from 2017)
12/31/2018	Equity in Kinman Income	$5490
	Investment in Kinman Co		$5490
	(To deferred Unrealized gross profit on intera equity sale - See Schedule 3 below)

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