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:
- The fair value of Lavery's depreciable assets, with an average remaining useful life of six years, exceeded their book value by $60 million.
- The remainder of the excess of the cost of the investment over the book value of net assets purchased was attributable to goodwill.
Required:
1. Prepare all appropriate journal entries related
to the investment during 2021, assuming Runyan accounts for this
investment by the equity method.
2. Prepare the journal entries required by Runyan,
assuming that the 10 million shares represent a 10% interest in the
net assets of Lavery rather than a 30% interest.
Solutions
Expert Solution
Solution:
Requirement 1:
| Purchase: | ||
| Investment in Lavery common shares | 346000000 | |
| Cash | 346000000 | |
| Net Income: | ||
| Investment in lavery common shares(30%*260 million) | 78000000 | |
| Investment Revenue | 78000000 | |
| Dividends:($ 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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Lavery's operations. Runyan received dividends of $4.50 per share
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