Question

In: Accounting

On January 4, 2021, Runyan Bakery paid $346 million for 10 million shares of Lavery Labeling...

On January 4, 2021, Runyan Bakery paid $346 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 received dividends of $2.80 per share on December 15, 2021, and Lavery reported net income of $260 million for the year ended December 31, 2021. The market value of Lavery's common stock at December 31, 2021, was $32 per share. On the purchase date, the book value of Lavery's identifiable net assets was $910 million and:

  1. The fair value of Lavery's depreciable assets, with an average remaining useful life of six years, exceeded their book value by $60 million.
  2. 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. Prepare all appropriate journal entries related to the investment during 2021, assuming Runyan accounts for this investment by the equity method.
2. Prepare the journal entries required by Runyan, assuming that the 10 million shares represent a 10% interest in the net assets of Lavery rather than a 30% interest.


Solutions

Expert Solution

Solution:

Requirement 1:

Purchase:
Investment in Lavery common shares 346000000
Cash 346000000
Net Income:
Investment in lavery common shares(30%*260 million) 78000000
Investment Revenue 78000000
Dividends:($ 2.80 per share payout* 10 million shares)
Cash 28000000
Investment in lavery common shares 28000000
Depreciation adjustment:($60 million*30%/6 years)
Investment revenue 3000000
Investment in lavery common shares 3000000
Adjusting entry :Not Required using Equity method

Requrement 2:

Purchase:
Investment in lavery common Shares 346000000
Cash 346000000
Net Income:No Jornal entry Reqired (no significant influence)
Dividends:($2.80 per share payout *10 million shares)
Cash 28000000
Investment in Lavery common shares 28000000
Adjusting entry : [($32 per share*10million shares)-$346 million]
Net unrealized holding gains and losses-OCI 26000000
Fair adjustment value 26000000

  PLEASE VOTEUP!!!!


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