Question

On January 4, 2018, Runyan Bakery paid $336 million for 10 million shares of Lavery Labeling...

On January 4, 2018, Runyan Bakery paid $336 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, 2018, and Lavery reported net income of $210 million for the year ended December 31, 2018. The market value of Lavery's common stock at December 31, 2018, was $32 per share. On the purchase date, the book value of Lavery's net assets was $860 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.

Required:

1. Prepare all appropriate journal entries related to the investment during 2018, assuming Runyan accounts for this investment by the equity method.

-Record the purchase of Lavery Labeling stock for $336 million.

-Record Runyan Bakery's share of Lavery's $210 million net income.

-Record the receipt of cash dividends of $2.5 per share on 10 million shares.

-Record any necessary entry related to depreciation. The fair value of Lavery's depreciable assets, with an average remaining useful life of five years, exceeded their book value by $100 million.

-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, 2018 was $32 per share.

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.

-Record the purchase of Lavery Labeling stock for $336 million.

-Record Runyan Bakery's share of Lavery's $210 million net income.

-Record the receipt of cash dividends of $2.5 per share on 10 million shares.

-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, 2016 was $32 per share.


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