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Homework answers / question archive / Harper, Inc
Harper, Inc. acquires 40 percent of the outstanding voting stock of Kinman Company on January 1, 2017, for $418,700 in cash. The book value of Kinman's net assets on that date was $875,000, although one of the company's buildings, with a $74,200 carrying amount, was actually worth $127,950. This building had a 10-year remaining life. Kinman owned a royalty agreement with a 20-year remaining life that was undervalued by $118,000. Kinman sold inventory with an original cost of $111,300 to Harper during 2017 at a price of $159,000. Harper still held $19,950 (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 $40,200 net loss and a $25,300 other comprehensive loss for 2017. The company still manages to declare and pay a $12,000 cash dividend during the year. During 2018, Kinman reported a $45,400 net income and declared and paid a cash dividend of $14,000. It made additional inventory sales of $98,000 to Harper during the period. The original cost of the merchandise was $61,250. All but 30 percent of this inventory had been resold to outside parties by the end of the 2018 fiscal year. Prepare all journal entries for Harper for 2017 and 2018 in connection with this investment. Assume that the equity method is applied. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round intermediate calculations.) View transaction list Journal entry worksheet Record the 40% accrual of income as earned by equity investee. Note: Enter debits before credits. Debit Credit Date General Journal 12/31/2018 Equity in Kinman income Investment in Kinman Co. 18,160 18,160 Record entry Clear entry View general journal
Solution:
Table 1
| Building | Building | Royalty Agreement |
| Excess Amount (127950-74200) | 53750 | 118,000 |
| Life | 10yr | 20yr |
| Amortization | 5375 | 5900 |
| 40% Acquisition | 2150 | 2360 |
| Total | 4510 |
Table 2
| Inventory | 2017 | 2018 |
| Remaining at year end |
19950 |
36750 (98000-61250) |
| profit margin | 30%=(159000-111300)/159000 | 61%=(159000-61250)/159000 |
| unearned gross profit | 5985 | 22418 |
| 40%Acquisition | 2394 | 8967 |
Journal Entries:
| Date | Particulars | Debit ($) | Credit ($) |
| 01/01/2017 | Investment in kinman | 418700 | |
| cash | 418700 | ||
| (Investment recorded) | |||
| 31/12/2017 | Dividend receivable | 4800 | |
| Investment in kinman Co | 4800 | ||
| (Dividend receivable 12000*40%) | |||
| 31/12/2017 | Cash | 4800 | |
| Dividend receivable | 4800 | ||
| (Dividend received) | |||
| 31/12/2017 | Equity in Kinman loss | 16080 | |
| Other comprehensive loss | 10120 | ||
| Investment in Kinman Co. | 26200 | ||
| (Recognised loss 40200*40% Other Comprehensive loss 25300*40%) | |||
| 31/12/2017 | Equity in Kinman(Amortization) | 4510 | |
| Investment in Kinman Co. | 4510 | ||
| (Amortization as per table 1 Recorded) | |||
| 31/12/2017 | Equity in kinman Income | 2394 | |
| Investment in kinman Co | 2394 | ||
| (Unrealised Profit recorded as per table 2 2017) | |||
| 31/12/2018 | Dividend receivable | 5600 | |
| Investment in Kinman Co | 5600 | ||
| (Dividend receivable during 2018 recorded = 14000 x 0.40) | |||
| 31/12/2018 | Cash | 5600 | |
| Dividend Receivable | 5600 | ||
| (Dividend for 2018 received is recorded) | |||
| 31/12/2018 | Investment in Kinman Co | 18160 | |
| Equity in Kinman Co | 18160 | ||
| (Income for year 2018 is recorded 45400*40%) | |||
| 31/12/2018 | Equity in Kinman Co Inocme | 4510 | |
| Investment In Kinman | 4510 | ||
| (Amortization as per table 1 is recorded for 2018) | |||
| 31/12/2018 | Investment in Kinman Co | 2394 | |
| Equity in Kinman Income | 2394 | ||
| (Last years unrealised profit realised) | |||
| 31/12/2018 | Equity in Kinman Co | 8967 | |
| Investment in Kinman | 8967 | ||
| (Unrealised profit of 2018 recorded as per table 2 2018) |
