Question

On January 4, 2021, Runyan Bakery paid $364 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 $4.50 per share on December 15, 2021, and Lavery reported net income of $350 million for the year ended December 31, 2021. The market value of Lavery's common stock at December 31, 2021, was $33 per share. On the purchase date, the book value of Lavery's identifiable net assets was $1,000 million and:

1. The fair value of Lavery's depreciable assets, with an average remaining useful life of five years, exceeded their book value by $100 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.

Question 1

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.

Hint: 4 journal entries, the entries should consider the following:

1. Record the purchase of Lavery Labeling stock for $364 million.
2. Record Runyan Bakery's share of Lavery's $350 million net income.
3. Record the receipt of cash dividends of $4.5 per share on 10 million 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, 2021 was $33 per share.

Answer 1

Requirement 1

Purchase ($ in millions)

Investment in equity affiliate......................................................... 364
Cash ................................................................................................ 364

Net income

Investment in equity affiliate (30% × $350 million) .............................. 105
Investment revenue.......................................................................... 105

Dividends

Cash (10 million shares × $4.5 per share)..................................................... 45
Investment in equity affiliate............................................................ 45

Depreciation adjustment   

Investment revenue ([30% × $100 million] ÷ 5 years).................................. 6
Investment in equity affiliate............................................................ 6

Adjusting entry

No entry to recognize changes in the fair value of the Lavery investment, as Runyan is accounting for its investment under the equity method.

For asked above :)

Purchase ($ in millions)

Investment in equity securities....................................................... 364
Cash ................................................................................................ 364

Net income

No entry

Dividends

Cash (10 million shares × $4.5 per share)..................................................... 45
Dividend revenue............................................................................. 45

Adjusting entry

Need to move from a fair value adjustment from $0 to ($34 million):

	Fair Value Adjustment
Balance on 1/4/2021	$ 0
± Adjustment needed to update fair value	?
Balance needed on 12/31/2021 ([10 × $33] – $364 )	$ (34)

Fair value adjustment

1/4/21 $0
change needed	$34
12/31/2021	$34

Loss on investments (unrealized, NI) (to balance).................... 34

Fair value adjustment ...................................................... 34