Question

On January 4, 2021, Runyan Bakery paid $326 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 $3.50 per share on December 15, 2021, and Lavery reported net income of $160 million for the year ended December 31, 2021. The market value of Lavery's common stock at December 31, 2021, was $30 per share. On the purchase date, the book value of Lavery's identifiable net assets was $810 million and:

1. The fair value of Lavery's depreciable assets, with an average remaining useful life of four years, exceeded their book value by $40 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.

• 1

  Record the purchase of Lavery Labeling stock for $326 million.

• 2

  Record Runyan Bakery's share of Lavery's $160 million net income.

• 3

  Record the receipt of cash dividends of $3.5 per share on 10 million shares.

• 4

  Record any necessary entry related to depreciation. The fair value of Lavery's depreciable assets, with an average remaining useful life of four years, exceeded their book value by $40 million.

• 5

  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 $30 per share.

• 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. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in millions. (i.e., 10,000,000 should be entered as 10).

• REQUIREMENT 2

• Record the purchase of Lavery Labeling stock for $326 million.

• 2

  Record Runyan Bakery's share of Lavery's $160 million net income.

• 3

  Record the receipt of cash dividends of $3.5 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 $30 per share.

Answer 1

1.

Event	Account Titles	Debit	Credit
1	Investment in Lavery Labelling shares	326
	Cash		326
2	Investment in Lavery Labelling shares	48
	Investment revenue [160million*30%]		48
3	Cash	35
	Investment in Lavery Labelling shares [10 million *3.5]		35
4	Investment revenue	3
	Investment in Lavery Labelling shares [40million*1/4*30%]		3
5	No entry to adjust fair value

2.

Event	Account Titles	Debit	Credit
1	Investment in Lavery Labelling shares	326
	Cash		326
2	No entry to record income
3	Cash	35
	Dividend revenue [10 million *3.5]		35
4	Loss on investment(unrealized NI)	26
	Fair value adjustment [326/10 - 30*10 million]		26