Patterson acquired 40 percent of the outstanding voting stock of Shapiro Company on January 1, 2021, for $230,000 in cash. The book value of Shapiro's net assets on that date was $400,000, although one of the company's buildings, with a $60,000 carrying (book) amount, was worth $100,000. This building had a 10-year remaining life. In addition, Shapiro owned a royalty agreement with a 20-year remaining life that was undervalued by $85,000 (i.e., the market value was greater than its book value).

Shapiro reported a $45,000 net income and a $20,000 other comprehensive loss for 2021. The company managed to declare and pay a $10,000 cash dividend during the year.

Shapiro sold inventory with an original cost of $60,000 to Patterson during 2021 at a transfer price of $90,000. Patterson still held $15,000 of the transfer price in inventory as of December 31, 2021. These goods were to be sold to outside parties during 2022.

During 2022, Shapiro reported a $60,000 net income. It made additional sales with a transfer price of $80,000 to Patterson 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 2022.

Required: (Be sure to show calculations to get credit)

1. (40 points) Assume that the equity method is applied. Prepare all journal entries for Patterson for 2021 and 2022 in connection with this investment. Provide supporting calculations if necessary. (Hint: There are about 10 entries to record the initial investment in Shapiro, equity income from Shapiro, other comprehensive income (loss), amortization of excess payment, dividend declaration and payment, and adjustments for deferred profit from the sale of inventory from Shapiro to Patterson.)