Reference no: EM132875951

Question - Harper, Inc., acquires 40 percent of the outstanding voting stock of Kinman Company on January 1, 2020, for $259,200 in cash. The book value of Kinman's net assets on that date was $465,000, although one of the company's buildings, with a $72,200 carrying amount, was actually worth $129,700. This building had a 10-year remaining life. Kinman owned a royalty agreement with a 20-year remaining life that was undervalued by $125,500.

Kinman sold inventory with an original cost of $109,200 to Harper during 2020 at a price of $156,000. Harper still held $16,200 (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 $49,800 net loss and a $27,000 other comprehensive loss for 2020. The company still manages to declare and pay a $9,000 cash dividend during the year.

During 2021, Kinman reported a $55,000 net income and declared and paid a cash dividend of $11,000. It made additional inventory sales of $124,000 to Harper during the period. The original cost of the merchandise was $77,500. All but 30 percent of this inventory had been resold to outside parties by the end of the 2021 fiscal year.

Required - Prepare all journal entries for Harper for 2020 and 2021 in connection with this investment. Assume that the equity method is applied.