Question

On January 4, 2021, Runyan Bakery paid $342 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 $240 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 $890 million and:

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

Answer 1

a.

Journal Entry ($ in Million)

Sl No.	Account Title	Debit	Credit
1.	Investment in Lavery Labeling shares	342,000,000
	Cash		342,000,000
	(To record purchase of investments)
2.	Investment in Lavery Labeling Shares	72,000,000
	Investment Revenue($240 Million * 30%)		72,000,000
	(To record share in net income)
3.	Cash(10 Million * $3.5)	35,000,000
	Investment in Lavery Labeling shares		35,000,000
	(To record Dividend Received)
4.	Depreciation Adjustment(Investment Revenue)[($100 million * 30%) / 5]	6,000,000
	Investment in Lavery Labeling Shares		6,000,000
	(To record the adjusting entry of depreciation expense)
5.	Unrealised Holding Loss - Net income(342M+ 72M - 35M - 6M) - 310M	63,000,000
	Fair value adjustment		63,000,000
	(To record the fair value adjustment)

b.

Journal Entry ($ in Million)

Sl No.	Account Title	Debit	Credit
1.	Investment in Lavery Labeling Shares	342,000,000
	Cash		342,000,000
	(To record purchase of Investment)
2.	No Entry
	( No significant influence)
3.	Dividends : Cash(10 Million * $3.5)	35,000,000
	Investment in Lavery Labeling Shares		35,000,000
	(To record Dividend Received)
4.	Unrealised Holding Loss - Net Income(34.2 - 31) * 10M	32,000,000
	Fair Value Adjustment		32,000,000
	(To record the fair value adjustment)