Question

Problem 12-9 Available-for-sale and equity method investments compared [LO12-3, LO12-4, LO12-5, LO12-6] On January 4, 2013, Runyan Bakery paid $332 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 $4.5 per share on December 15, 2013, and Lavery reported net income of $190 million for the year ended December 31, 2013. The market value of Lavery's common stock at December 31, 2013, was $30 per share. On the purchase date, the book value of Lavery's net assets was $840 million and: a. The fair value of Lavery's depreciable assets, with an average remaining useful life of four 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. Prepare all appropriate journal entries related to the investment during 2013, assuming Runyan accounts for this investment by the equity method. (Enter your answers in millions. Leave no cells blank. If no entry is required, select "No journal entry required" in the account field and enter zero (0) in the amount field.) General Journal Debit Credit Purchase: Net income: Dividends: Depreciation adjustment: Adjusting entry 2. Prepare the journal entries required by Runyan, assuming that the 10 million shares represent a 20% interest in the net assets of Lavery rather than a 30% interest, and that Runyan accounts for the investment as available for sale. (Enter your answers in millions. Leave no cells blank. If no entry is required, select "No journal entry required" in the account field and enter zero (0) in the amount field.) General Journal Debit Credit Purchase: Net income: Dividends: Adjusting entry:

Answer 1

($ in millions)

(1) Journal Entries in the books of Runyan Bakery (Equity Method)

Date	Particulars	Debit	Credit
04-01-2013	Investments in Associates A/c	332
	Cash A/c		332
	(Being Shares Purchased with Lavery Labelling Comapny)
15-12-2013	Cash A/c	45
	Investement in Associates A/c		45
	(Being Dividend Received from Lavery Labelling Company)
31-12-2013	Investment in Associates A/c	57
	Investment in revenue a/c		57
	(Being Income recognised)
31-12-2013	Net Unealised gain with Lavanya	6
	Fair Value adjustment		6
	(Beinf depriciation allocated)

(1) Journal Entries in the books of Runyan Bakery (Available for Sale)

Date	Particulars	Debit	Credit
04-01-2013	Investments in Associates A/c	332
	Cash A/c		332
	(Being Shares Purchased with Lavery Labelling Comapny)
15-12-2013	Cash A/c	45
	Investement in Associates A/c		45
	(Being Dividend Received from Lavery Labelling Company)
31-12-2013	Investment in Associates A/c	57
	Investment in revenue a/c		57
	(Being Income recognised)
31-12-2013	Investment in revenue a/c	6
	Investment in Associates A/c		6
	(Beinf depriciation allocated)