ACC 402 - Problem 28 Maria Pia Velasquez

Journal entries:

DATE ACCOUNT DEBIT CREDIT

January 1, 2017 Investment in Kinman Company $210,000
Cash $210,000

To record acquisition of 40 percent of the

outstanding shares of Kinman Company.
2017 Dividend receivable $4,000
Investment in Kinman Company $4,000

To record a dividend declaration by Kinman

Company ($10,000 x 40%).
2017 Cash $4,000
Dividend receivable $4,000

To record collection of the cash dividend.

December 31, 2017 Equity in investee income $16,000
Other comprehensive loss 8,000
Investment in Kinman Company $24,000

To accrue 40 percent of the 2017 reported

losses of investee ($40,000 + $20,000 x 40%).
December 31, 2017 Equity in investee income $3,300
Investment in Kinman Company $3,300

To record amortization of excess payment

allocated to building and royalty (schedule 1).
December 31, 2017 Equity in investee income $2,000
Investment in Kinman Company $2,000

To defer recognition of intra-entity gross profit

until inventory is sold to outside parties
(schedule 2).
2018 Dividend Receivable $4,800
Investment in Kinman Company $4,800

To record a dividend declaration by Kinman

Company ($12,000 x 40%).
2018 Cash $4,800
Dividend receivable $4,800

To record collection of the cash dividend.

December 31, 2018 Investment in Kinman Company $16,000
Equity in investee income $16,000

To accrue 40 percent of the 2018 reported

income of investee ($40,000 x 40%).
December 31, 2018 Equity in investee income $3,300
Investment in Kinman Company $3,300
ACC 402 - Problem 28 Maria Pia Velasquez

To record amortization of excess payment

allocated to building and royalty (schedule 1).
December 31, 2018 Investment in Kinman Company $2,000
Equity in investee income $2,000

To record income on intra-entity sale that now

can be recognized after sales to outsiders.
December 31, 2018 Equity in investee income $3,600
Investment in Kinman Company $3,600

To defer recognition of intra-entity gross profit

until inventory is sold to outside parties
(schedule 3).

Schedule 1: Amortization calculations

Payment by investor $210,000

Percentage of book value acquired ($400,000 x 40%) 160,000
Payment in excess of book value $50,000
Excess payment identified with specific assets:
Building ($40,000 undervaluation x 40%) $16,000
Royalty ($85,000 undervaluation x 40%) 34,000 50,000
Excess payment not identified with specific assets $ -- 0 --

ASSET ATTRIBUTED COST REMAINING USEFUL LIFE ANNUAL AMORTIZATION

BUILDING $16,000 10 years $1,600
ROYALTY 34,000 20 years 1,700
Total $3,300

Schedule 2: Deferral of intra-entity gross profits in inventory calculations for 2017

REMAINING GROSS GROSS PROFIT IN INVESTOR DEFERRED INTRA-

ENDING PROFIT ENDING OWNERSHIP ENTITY GROSS
INVENTORY PERCENTAGE INVENTORY PERCENTAGE PROFIT
$15,000 33⅓% $5,000 40% $2,000

Schedule 3: Deferral of intra-entity gross profits in inventory calculations for 2018

REMAINING GROSS GROSS PROFIT IN INVESTOR DEFERRED INTRA-

ENDING PROFIT ENDING OWNERSHIP ENTITY GROSS
INVENTORY PERCENTAGE INVENTORY PERCENTAGE PROFIT
$24,000 37.5% $9,000 40% $3,600