Question

In: Accounting

Problem 12-10 (Algo) Investment securities and equity method investments compared [LO12-6, 12-7] On January 4, 2021,...

Problem 12-10 (Algo) Investment securities and equity method investments compared [LO12-6, 12-7] On January 4, 2021, Runyan Bakery paid $328 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 $2.50 per share on December 15, 2021, and Lavery reported net income of $170 million for the year ended December 31, 2021. The market value of Lavery's common stock at December 31, 2021, was $31 per share. On the purchase date, the book value of Lavery's identifiable net assets was $820 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

Requirement 1

Purchase ($ in millions)

Investment in equity affiliate......................................................... 328
Cash ................................................................................................ 328

Net income

Investment in equity affiliate (30% × $170 million) .............................. 51
Investment revenue.......................................................................... 51

Dividends

Cash (10 million shares × $2.5 per share)..................................................... 25
Investment in equity affiliate............................................................ 25

Depreciation adjustment   

Investment revenue ([30% × $60 million] ÷ 6 years).................................. 3
Investment in equity affiliate............................................................ 3

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.

Requirement 2

Purchase ($ in millions)

Investment in equity securities....................................................... 328
Cash ................................................................................................ 328

Net income

No entry

Dividends

Cash (10 million shares × $2.5 per share)..................................................... 25
Dividend revenue............................................................................. 25

Adjusting entry

Need to move from a fair value adjustment from $0 to ($18 million):

Fair Value Adjustment

Balance on 1/4/2021

$ 0

± Adjustment needed to update fair value

?

Balance needed on 12/31/2021 ([10 × $31] – $328 )

$ (18)

fair value adjustment
1/4/21 0
change needed 18   
12/31/21 18

Loss on investments (unrealized, NI) (to balance).................... 18

Fair value adjustment ......................................................   18


Related Solutions

Problem 12-10 (Algo) Investment securities and equity method investments compared [LO12-6, 12-7] On January 4, 2021,...
Problem 12-10 (Algo) Investment securities and equity method investments compared [LO12-6, 12-7] On January 4, 2021, Runyan Bakery paid $328 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 $2.50 per share on December 15, 2021, and Lavery reported net income of $170 million for the year ended December 31,...
Problem 12-9 Available-for-sale and equity method investments compared [LO12-3, LO12-4, LO12-5, LO12-6] On January 4, 2013,...
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,...
Exercise 12-23 (Algo) Equity method [LO12-6, 12-7] On January 1, 2021, Cameron Inc. bought 20% of...
Exercise 12-23 (Algo) Equity method [LO12-6, 12-7] On January 1, 2021, Cameron Inc. bought 20% of the outstanding common stock of Lake Construction Company for $240 million cash, giving Cameron the ability to exercise significant influence over Lake’s operations. At the date of acquisition of the stock, Lake's net assets had a fair value of $600 million. Its book value was $500 million. The difference was attributable to the fair value of Lake's buildings and its land exceeding book value,...
Exercise 12-24 (Algo) Equity method, partial year [LO12-6, 12-7] On July 1, 2021, Gupta Corporation bought...
Exercise 12-24 (Algo) Equity method, partial year [LO12-6, 12-7] On July 1, 2021, Gupta Corporation bought 20% of the outstanding common stock of VB Company for $100 million cash, giving Gupta the ability to exercise significant influence over VB’s operations. At the date of acquisition of the stock, VB’s net assets had a total fair value of $450 million and a book value of $200 million. Of the $250 million difference, $35 million was attributable to the appreciated value of...
Problem 12-7 (Algo) Various transactions related to equity investments: fair value through net income [LO12-5] The...
Problem 12-7 (Algo) Various transactions related to equity investments: fair value through net income [LO12-5] The following selected transactions relate to investment activities of Ornamental Insulation Corporation during 2021. The company buys equity securities as noncurrent investments. None of Ornamental’s investments are large enough to exert significant influence on the investee. Ornamental’s fiscal year ends on December 31. No investments were held by Ornamental on December 31, 2020. Mar. 31 Acquired Distribution Transformers Corporation common stock for $470,000. Sep. 1...
Problem 12-7 (Algo) Various transactions related to equity investments: fair value through net income [LO12-5] The...
Problem 12-7 (Algo) Various transactions related to equity investments: fair value through net income [LO12-5] The following selected transactions relate to investment activities of Ornamental Insulation Corporation during 2021. The company buys equity securities as noncurrent investments. None of Ornamental’s investments are large enough to exert significant influence on the investee. Ornamental’s fiscal year ends on December 31. No investments were held by Ornamental on December 31, 2020. Mar. 31 Acquired Distribution Transformers Corporation common stock for $520,000. Sep. 1...
Exercise 12-22 (Algo) Equity method; adjustment for depreciation [LO12-6, 12-7] Fizer Pharmaceutical paid $81 million on...
Exercise 12-22 (Algo) Equity method; adjustment for depreciation [LO12-6, 12-7] Fizer Pharmaceutical paid $81 million on January 2, 2021, for 3 million shares of Carne Cosmetics common stock. The investment represents a 20% interest in the net assets of Carne and gave Fizer the ability to exercise significant influence over Carne’s operations. Fizer received dividends of $2 per share on December 21, 2021, and Carne reported net income of $40 million for the year ended December 31, 2021. The fair...
Exercise 12-6 (Algo) Trading securities [LO12-1, 12-3] Mills Corporation acquired as an investment $300 million of...
Exercise 12-6 (Algo) Trading securities [LO12-1, 12-3] Mills Corporation acquired as an investment $300 million of 6% bonds, dated July 1, on July 1, 2021. Company management is holding the bonds in its trading portfolio. The market interest rate (yield) was 4% for bonds of similar risk and maturity. Mills paid $350 million for the bonds. The company will receive interest semiannually on June 30 and December 31. As a result of changing market conditions, the fair value of the...
Problem 12-13 Equity method [LO12-6, 12-7] Northwest Paperboard Company, a paper and allied products manufacturer, was...
Problem 12-13 Equity method [LO12-6, 12-7] Northwest Paperboard Company, a paper and allied products manufacturer, was seeking to gain a foothold in Canada. Toward that end, the company bought 40% of the outstanding common shares of Vancouver Timber and Milling, Inc., on January 2, 2018, for $580 million. At the date of purchase, the book value of Vancouver's net assets was $865 million. The book values and fair values for all balance sheet items were the same except for inventory...
Problem 12-3 (Algo) Securities available-for-sale; bond investment; effective interest [LO12-1, 12-4] Fuzzy Monkey Technologies, Inc., purchased...
Problem 12-3 (Algo) Securities available-for-sale; bond investment; effective interest [LO12-1, 12-4] Fuzzy Monkey Technologies, Inc., purchased as a long-term investment $180 million of 6% bonds, dated January 1, on January 1, 2021. Management intends to have the investment available for sale when circumstances warrant. For bonds of similar risk and maturity the market yield was 8%. The price paid for the bonds was $160 million. Interest is received semiannually on June 30 and December 31. Due to changing market conditions,...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT