Question

On January 4, 2018, Runyan Bakery paid $326 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 exercise significant influence over Lavery's operations. Runyan chose the fair value option to account for this investment. Runyan received dividends of $4 per share on December 15, 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 $30 per share. On the purchase date, the book value of Lavery's net assets was $810 million and:

The fair value of Lavery's depreciable assets, with an average remaining useful life of [a(27)] years, exceeded their book value by $40 million.

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 the 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 significant influence.
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.
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.
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.

Answer 1

Requirement 1-a. Journal Entries related to the investment during 2018 under the fair value method (Assuming No Significant Influence)

Date Particulars Debit Amount Credit Amount 04.01.2018 Available for Sale Securities $326,000,000 Cash $326,000,000 (Recording of Investment) 15.12.2018 Cash $12,000,000 Dividend Revenue (10,000,000 * $4) * 30% $12,000,000 (Accounting for Cash Dividend Rceived) 31.12.2018 Unrealised Holding Loss - Equity $26,000,000 Securities Fair Value Adjustment [($32.6-$30)] * 10,000,000 $26,000,000 (Accounting for Unrealised Loss on Fair Value Adjustment of Securities)

Requirement 1-b. The effct of Journal Entries on 2018 Net Income and the amount at which Investment is carried in December 31, 2018 Balance Sheet

1. The Net Income of Runyan Bakery for the year 2018 will be decreased by $ 14,000,000 ($26,000,000 - $ 12,000,000).

2. The Investment will be carried at $ 300,000,000 ($326,000,000 - $26,000,000) in the December 31, 2018 Balance Sheet.

Requirement 2-a. Journal Entries related to the investment during 2018 under the Equity method (Assuming Significant Influence)

Date	Particulars	Debit Amount	Credit Amount
04.01.2018	Investment in Lavery Lablling Company Common Stock	$326,000,000
	Cash		$326,000,000
	(Recording of Investment Assuming No Significant Influence)
15.12.2018	Cash	$12,000,000
	Dividend Revenue (10,000,000 * $4) * 30%		$12,000,000
	(Accounting for Cash Dividend Rceived)
31.12.2018	Investment in Lavery Lablling Company Common Stock	$48,000,000
	Revenue from Investment ($160,000,000 * 30%)		$48,000,000
31.12.2018	Unrealised Holding Loss - Equity	$26,000,000
	Securities Fair Value Adjustment [($32.6-$30)] * 10,000,000		$26,000,000
	(Accounting for Unrealised Loss on Fair Value Adjustment of Securities)

Requirement 2-b. The effct of Journal Entries on 2018 Net Income and the amount at which Investment is carried in December 31, 2018 Balance Sheet

1. The Net Income of Runyan Bakery for the year 2018 will be decreased by $ 22,000,000 ($48,000,000 - $26,000,000).

2. The Investment will be carried at $ 336,000,000 ($326,000,000 + $48,000,000 - $26,000,000 - $12,000,000) in the December 31, 2018 Balance Sheet.