Harper, Inc., acquires 40 percent of the outstanding voting stock of Kinman Company on January 1, 2020, for $210,000 in cash. The book value of Kinman’s net assets on that date was $400,000, although one of the company’s buildings, with a $60,000 carrying amount, was actually worth $100,000. This building had a 10-year remaining life. Kinman owned a royalty agreement with a 20-year remaining life that was undervalued by $85,000.
Kinman sold inventory with an original cost of $60,000 to Harper during 2020 at a price of $90,000. Harper still held $15,000 (transfer price) of this amount in inventory as of December 31, 2020. These goods are to be sold to outside parties during 2021.
Kinman reported a $40,000 net loss and a $20,000 other comprehensive loss for 2020. The company still manages to declare and pay a $10,000 cash dividend during the year.
During 2021, Kinman reported a $40,000 net income and declared and paid a cash dividend of $12,000. It made additional inventory sales of $80,000 to Harper during the period. The original cost of the merchandise was $50,000. All but 30 percent of this inventory had been resold to outside parties by the end of the 2021 fiscal year.
Prepare all journal entries for Harper for 2020 and 2021 in connection with this investment. Assume that the equity method is applied.
