Harper acquires 40 percent of the outstanding voting stock of Kinman Company on
ID: 2602199 • Letter: H
Question
Harper acquires 40 percent of the outstanding voting stock of Kinman Company on January 1, 2014, 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 2014 at a price of $159,000. Harper still held $19,950 (transfer price) of this amount in inventory as of December 31, 2014. These goods are to be sold to outside parties during 2015. Kinman reported a $40,200 net loss and a $25,300 other comprehensive loss for 2014, The company still manages to declare a $12,000 cash dividend during the year. During 2015, Kinman reported a $45,400 net income and declared 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 2015 fiscal year. Prepare all journal entries for Harper for 2014 and 2015 in connection with this investment. Assume that the equity method is applied.
There are 12 journal entries.
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 2014
12. Record the deferred unrealized gross profit on intra-entity sale
Explanation / Answer
Journal Entries for Harper Co.
1/1/14 Investment in Kinman Co.............. 418,700
Cash.............................................. 418,700
(To record initial investment)
During Dividend Receivable....................... 4,800
2014 Investment in Kinman Co........ 4,800
(To record a dividend declaration by Kinman
Company: $12,000 x 40%)
During Cash.................................................... 4,800
2014 Dividend Receivable................. 4,800
(To record collection of the cash dividend)
12/31/14 Equity in Kinman Income—Loss. 16,080
Other Comprehensive Income-
Loss of Kinman................................ 10,120
Investment in Kinman Co........ 26,200
(To record accrual of income as earned by
equity investee, 40% of reported balances)
12/31/14 Equity in Kinman Income—Loss. 4,510
Investment in Kinman Co........ 4,510
(To record amortization relating to acquisition
of Kinman—see Schedule 1 below)
12/31/14 Equity in Kinman Income-Loss.... 2,394
Investment in Kinman Co........ 2,394
(To defer unrealized gross profit on intra-entity
sale see Schedule 2 below)
During Dividend Receivable....................... 5,600
2015 Investment in Kinman Co........ 5,600
(To record a dividend declaration by Kinman
Company: $14,000 x 40%)
During Cash.................................................... 5,600
2015 Investment in Kinman Co........ 5,600
(To record collection of the cash dividend)
12/31/15 Investment in Kinman Co.............. 18,160
Equity in Kinman Income......... 18,160
(To record 40% accrual of income as earned by
equity investee)
12/31/15 Equity in Kinman Income............... 4,510
Investment in Kinman Co........ 4,510
(To record amortization relating to acquisition
of Kinman)
12/31/15 Investment in Kinman Co.............. 2,394
Equity in Kinman Income......... 2,394
(To recognize income deferred from 2014)
12/31/15 Equity in Kinman Income............... 4,410
Investment in Kinman Co........ 4,410
(To defer unrealized gross profit on intra-entity
sale—see Schedule 3 below)
Schedule 1—Allocation of Purchase Price and Related Amortization
Purchase price .............................................................. $418,700
Percentage of book value acquired
($875,000 × 40%)........................................................... (350,000)
Payment in excess of book value.................................. $68,700
Annual
Excess payment identified with specific Life Amortization
assets
Building ($53,750 × 40%) 21,500 10 yrs. $2,150
Royalty agreement ($118,000 × 40%) $47,200 20 yrs. 2,360
Total annual amortization $4,510
Schedule 2—Deferral of Unrealized Gross Profit—2014
Inventory remaining at end of year........................................................ $19,950
Gross profit percentage ($47,700 ÷ $159,000)..................................... × 30%
Gross profit remaining in inventory................................................. $5,985
Ownership percentage............................................................................. × 40%
Unrealized gross profit to be deferred until 2015......................... $ 2,394
Schedule 3—Deferral of Unrealized Gross Profit—2015
Inventory remaining at end of year (30%)............................................ $29,400
Gross profit percentage ($36,750 ÷ $98,000)....................................... × 37½%
Gross profit remaining in inventory................................................. $11,025
Ownership percentage............................................................................. × 40%
Unrealized gross profit to be deferred until 2016......................... $ 4,410
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