Question

On January 4, 2018, Runyan Bakery paid $330 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 chose the fair value option to account for this investment. Runyan received dividends of $300 per share! on December 15, 2018. and Lavery reported net income of $180 million for the year ended December 31, 2018 The market value o Lavery's common stock at December 31, 2018, was $31 per share. On the purchase date, the book value of Lavery's net assets was! $830 million and a. The fair value of Lavery's depreciable assets, with an average remaining useful life of 7 years, exceeded their book value by $70 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: 1-0. Prepare all appropriate journal entries related to the investment during 2018, assuming Runyan accounts for this investment under the fair value option, and accounts for the Lavery investment in a manner similar to what it would use for securities for which there is not significant influence. 1-b. Calculate the effect of these journal entries on 2018 net income, and the amount at which the investment is carried in the December 31, 2018, balance sheet 2-. Prepare all appropriate journal entries related to the investment during 2018, assuming Runyan accounts for this investment under the fair value option, but uses equity method accounting to account for Lavery's income and dividends, and then records a fair value adjustment at the end of the year that allows it to comply with GAAP 2-b Calculate the effect of these journal entries on 2018 net income, and the amount at which the investment is carried in the December 31, 2018, balance sheet complete this question by entering your answers in the tabs below. Reg 1A Reg 1B Req 2A Reg 2B Prepare all appropriate journal entries related to the investment during 2018, assuming Runyan accounts for this investment under the fair value option, and accounts for the Lavery investment in a manner similar to what it would use for securities for which there is not

Answer 1

1a.

Event	Account Titles	Debit	Credit
1	Investment in Lavery Labelling shares	330
	Cash		330
2	No entry
3	Cash	30
	Dividend revenue [10 million *3]		30
4	No entry
5	Unrealized holding loss - NI	20
	Fair value adjustment [330/10 -31]*10million]		20

1b.

Net Income	12	[30-18]
Investment	310	[330-20]

2a.

Event	Account Titles	Debit	Credit
1	Investment in Lavery Labelling shares	330
	Cash		330
2	Investment in Lavery Labelling shares	54
	Investment revenue [180million* 30%]		54
3	Cash	30
	Investment in Lavery Labelling shares		30
4	Investment revenue	3
	Investment in Lavery Labelling shares [(70/7)*30%]		3
5	Unrealized holding loss - NI	41
	Fair value adjustment [330+54-30-3-310]		41

2b.

Net Income	10	[54-3-41]
Investment	310