Question

On January 4, 2018, Runyan Bakery paid $324 million for 10 million shares of Lavery Labeling Company common stock. The investment represents a 30% interest in the net assets of Lavery and gave Runyan the ability to excercise significant influence over Lavery's operations. Runyan chose the fair value option to account for this investment. Runyan received dividends of $2.00 per share on December 31, 2018, and Lavery reported net income of $160 million for the year ended December 31, 2018. The market value of Lavery's common stock at December 31, 2018 was $31 per share. On the purchase date, the book value of Lavery's net assets was $800 million and:

a. The fair value of Lavery's depreciable assets, with an average remaining useful life of six years, exceeded their book value by $80 million.

b. The remainder of the excess of the cost of the investment over the book value of net assets purchased was attributable to goodwill. Required:

1-a. Prepare all appropriate journal entries related to the investment during 2018, assuming Runyan accounts for this investment under fair value option, and accounts for the Lavery investment in a manner similar to what it would use for securities for which there is not specific influence.

(Record the purchase of Lavery stock for $324 million) (Record Runyan share of Lavery's $160 mil net income)

(Record the receipt of cash dividends of $2 per share on 10 mil shares)

(Record any nec. entry related to depreciation. The fair value of Lavery's depreciable assets, with an average remaining useful life of six years, exceeded their book value by $80 mil) (Record any nec. adj entry to correctly report the investment on the balance sheet. The market value of Lavery's common stock at Dec 31 2018 was $1 per share)

1-b Calculate the effect of these journal entries on 2018 net income, and the amount at which the investment is carried in the December 31, 2018, balance sheet.

(Effect on net income)

(Investment)

2-a Prepare all appropriate journal entries related to the investment during 2018, assuming Runyan accounts for this investment under the fair value option, but uses equity method accounting to account for Lavery's income and dividends, and then records a fair value adjustment at the end of the year that allows it to comply with GAAP.

(Record the purchase of Lavery Labeling stock for $324 mil)

(Record Runyan's share of Lavery's $160 mil net income)

(Record the receipt of cash dividends of $2 per share on 10 mil shares)

(Record any nec entry to related depreciation. The fair value of Lavery's depreciable assets, with an avg remaining useful life of six years, exceeded their book value by $80 mil) (Record any nec adj entry to correctly report the investment on the bal sheet. The market value of Lavery's common stock at Dec 31, 2018 was $1 per share)

2-b Calculate the effect of these journal entries on 2018 net income, and the amount at which the investment is carried in the December 31, 2018, balance sheet.

(Calculate the effect of these journal entries on 2018 net income, and the amount at which the investment is carried in the Dec 31, 2018 balance sheet)

(net income) (Investment)

Answer 1

Part 1 A

Event	General journal	debit	credit
	Record the purchase of Lavery Labelling stock for $324 million
1	Investment in Lavery Labeling shares	324
	Cash		324
	Record Runyan Bakery’s share of Lavery’s $160 million net income
2	No entry (No Journal entry required)	0
	No entry		0
	Record the receipt of cash dividends of $2 per share on 10 million shares
3	Cash(10 million shares x $2)	20
	Investment revenue		20
	Record the depreciation
4	No entry (No Journal entry required)	0
	No entry		0
	Record any necessary adjusting entry to correctly report the investment on the balance sheet. The market value of Lavery’s common stock at December 31, 2018 was $31 per share
5	Net unrealized holding gains and losses—I/S([10 million shares x $310] – $324 million)	14
	Fair value adjustment		14

Part 1 B

Effect on net income (interest revenue – net realized gain and losses) (20-14)	$6	million
Investment (324-14)	$310	million

Part 2 A

Event	General journal	debit	credit
	Record the purchase of Lavery Labelling stock for $324 million
1	Investment in Lavery Labeling shares	324
	Cash		324
	Record Runyan Bakery’s share of Lavery’s $160 million net income
2	Investment in Lavery Labeling shares	48
	Investment revenue (160*30%)		48
	Record the receipt of cash dividends of $2 per share on 10 million shares
3	Cash(10 million shares x $2)	20
	Investment revenue		20
	Record the depreciation
4	Investment revenue (((800+80)*30%)-(800*30%))/6	4
	Investment in Lavery Labeling shares		4
	Record any necessary adjusting entry to correctly report the investment on the balance sheet. The market value of Lavery’s common stock at December 31, 2018 was $31 per share
5	Unrealized holding losses and gains	38
	Fair value adjustment ([10 million shares x $31] – $324 million)-(80*30%)		38

Part 2 B

Effect on net income (interest revenue – net realized gain and losses) (48-4-38)	$6	million
Investment (324-14)	$310	million