Harper, Inc., acquires 40 percent of the outstanding voting stock of Kinman Company on January 1, 2020, for $347,200 in cash. The book value of Kinman's net assets on that date was $680,000, although one of the company's buildings, with a $64,800 carrying amount, was actually worth $117,800. This building had a 10-year remaining life. Kinman owned a royalty agreement with a 20-year remaining life that was undervalued by $135,000. Kinman sold inventory with an original cost of $77,700 to Harper during 2020 at a price of $111,000. Harper still held $24,900 (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 $45,600 net loss and a $24,200 other comprehensive loss for 2020. The company still manages to declare and pay a $13,000 cash dividend during the year. During 2021, Kinman reported a $49,600 net income and declared and paid a cash dividend of $15,000. It made additional inventory sales of $114,000 to Harper during the period. The original cost of the merchandise was $71,250. 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 2019 and 2020 in connection with this investment. Assume that the equity method is applied.

Kinman Company    272,000  debit

Royalties Kinman Co 54,000  debit

Building Kinman Co   21,200  debit

  Cash                             347,200  credit

--to record the purchase--

sales revenue 9,960 debit

        account receivables 9,960 credit

inventory                 6,972 debit

   cost of goods sold   6,972 credit

--to record the unsold part of the inventory in Kinman--

Cash       6,000 debit

Kinman Company   6,000 credit

-- to record dividends--

loss on investment 18,240 debit

retained earnings    9,680 debit

       Kinman Company 27,920 credit

--to record net loss of Kinman--

Explanation:

60% of Kinman Company:

680,000 x 40% = 272,000

Excess in Market value of building:

117,800 - 64,800 = 53,000

53,000 x 40% = 21,200

Royalty agreement market value: 135,000

135,000 x 40% = 54,000

Total Value:

272,000 + 21,200 + 54,000 = 347,200

now, we must "unrecord" the unsold part of the inventory of Kinman as it is now considered a intra-entity transaction.

Sales Revenue:

24,900 x 40% =  9,960

Cost of Good Sold:

77,700 x 24,900/111,000 x 40% = 6,972

Dividends: they are not considered gain but a distribution of cash from Kinman to us.

15,000 x 40% = 6,000

Losses impact the equity thus, decrease the Kinman Company account

45,600 + 24,200 = 69,800

69,800 x 40% = 27,920

The comprehensive loss will directly decrease retained earnigns rather a loss directly.

45,600 x 40% = 18,240

24,200 x 40% =  9,680

The rest of the transactions occurs in 2021 and we are only asked for 2019/2020

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