Harper Inc acquires 40 percent of the outstanding voting sto

Harper, Inc. acquires 40 percent of the outstanding voting stock of Kinman Company on January 1, 2017, for $320,500 in cash. The book value of Kinman\'s net assets on that date was $620,000, although one of the company\'s buildings, with a $78,400 carrying amount, was actually worth $133,650. This building had a 10-year remaining life. Kinman owned a royalty agreement with a 20-year remaining life that was undervalued by $126,000. Kinman sold inventory with an original cost of $79,800 to Harper during 2017 at a price of $114,000. Harper still held $20,550 (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 $56,400 net loss and a $22,200 other comprehensive loss for 2017. The company still manages to declare and pay a $30,000 cash dividend during the year. During 2018, Kinman reported a $61,000 net income and declared and paid a cash dividend of $32,000. It made additional inventory sales of $128,000 to Harper during the period. The original cost of the merchandise was $80,000. All but 30 percent of this inventory had been resold to outside parties by the end of the 2018 fiscal year. List the 12 required entries.

Solution

1. To record acquisition of interest Date Account Title Debit Credit Jan.1, 2017 Investment in Kinman Co. 320500 Cash 320500 2. To record acquisition of assets and liabilities Date Account Title Debit Credit Jan.1, 2017 Net assets (405 of $620,000) 248000 Buildings * 22100 Royalty agreements ** 50400 Investment in Kinman Co. 320500 Excess of fair value of buildings = $133,650-$78,400 =55,250 40% of this * 22100 Undervaluation of royalty agreements = $126,000 40% of this ** =50,400 3. To record equity income from Kinman co. For 2017 Date Account Title Debit Credit Dec.31, 2017 Equity income fromKinman Co. * 31440 Investment in Kinman Co. 31440 * 40% of ($56,400+22,200) = $ 31,440 4. To record dividend received from Kinman co. For 2017 Date Account Title Debit Credit Dec.31, 2017 Cash * 12000 Investment in Kinman Co. 12000 * 40% of $30,000 = $ 12,000 5. Amortization of excess fair value on buildings and royalty agreement Date Account Title Debit Credit Dec.31, 2017 Amortization expenses * 4730 Investment in Kinman Co. 4730 Excess fair value for buildings 22100 Remaining life 10 years Amortization of excess paid (A) 2210 Exces fair value for royalty agreement 50400 Remaining life 20 years Amortization of excess paid (B) 2520 Total amortization expense (A + B) * 4730 6.Elimination of profit on intercompany transfer Date Account Title Debit Credit Dec.31, 2017 Cost of goods sold * 6165 Inventory 6165 Sale value of goods transferred 114000 Cost of these goods 79800 Gross profit (114,000 - 79,800) 34200 Gross profit margin 30% Ending inventory of transfer from Kinman = $ 20,550 Gross proft on ending inventory 6165 7. Recording the unrealized profit from 2017 in 2018 Date Account Title Debit Credit Jan.1., 2018 Retained earnings - Harper. Inc. (40% of 6,165) 2466 Retained earnings - Kinman Co. (60% of $6,165) 3699 Cost of goods sold 6165 8. To record equity income from Kinman co. For 2018 Date Account Title Debit Credit Dec.31, 2018 Investment in Kinman Co. 24400 Equity income from Kinman Co. * 24400 * 40% of $61,000 = $ 24,400 9. To record dividend received from Kinman co. For 2018 Date Account Title Debit Credit Dec.31, 2018 Cash * 12800 Investment in Kinman Co. 12800 * 40% of $32,000 = $ 12,800 10. Amortization of excess fair value on buildings and royalty agreement in 2018 Date Account Title Debit Credit Dec.31, 2018 Amortization expenses * 4730 Investment in Kinman Co. 4730 Excess fair value for buildings 22100 Remaining life 10 years Amortization of excess paid (A) 2210 Exces fair value for royalty agreement 50400 Remaining life 20 years Amortization of excess paid (B) 2520 Total amortization expense (A + B) * 4730 11.Elimination of profit on intercompany transfer in 2018 Date Account Title Debit Credit Dec.31, 2018 Cost of goods sold * 14400 Inventory 14400 Sale value of goods transferred 128000 Cost of these goods 80000 Gross profit (114,000 - 79,800) 48000 Gross profit margin 37.50% Ending inventory of transfer from Kinman = 30% of $128,000 = $ 38,400 Gross proft on ending inventory * 14400 7. Recording the unrealized profit from 2018 in Jan.2019 Date Account Title Debit Credit Jan.1 , 2019 Retained earnings - Harper. Inc. (40% of 14,400) 5760 Retained earnings - Kinman Co. (60% of $14,400) 8640 Cost of goods sold 14400