Question

Problem 12-11 (Algo) Fair value option; equity method investments [LO12-5, 12-8] On January 4, 2021, Runyan Bakery paid $338 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 $2.00 per share on December 15, 2021, and Lavery reported net income of $220 million for the year ended December 31, 2021. The market value of Lavery's common stock at December 31, 2021, was $33 per share. On the purchase date, the book value of Lavery's identifiable net assets was $870 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 $50 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: Assuming Runyan accounts for this investment under the fair value option, prepare all appropriate journal entries in a manner similar to accounting for securities for which there is not significant influence. (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).) View transaction list

Answer 1

Solution:

Sl No.	Date	Account title and explanation	Debit	Credit
1	Jan. 4	Investment in Runyan Bakery shares ( 10,000,000 shares * $ 33.8)	$        338,000,000
		Cash		$        338,000,000
		[To equity investment made]
2	Dec. 31	No Journal Entry	$                            -
				$                            -
3	Dec. 15	Cash (10,000,000*2 per share)	$          20,000,000
		Dividend Revenue		$          20,000,000
		[To record dividends]
4	Dec. 31	Net unrealized holding gains and losses (( $ 33.8 - $ 33)* 10,000,000)	$             8,000,000
		Fair adjustment value		$             8,000,000
		[ To adjust fair value]

Notes:

1) No entry is required to record net income because here entity has no significant influence over other entity.

2) Under fair value option method we should not consider the changes in the book value of assets in adjustment, we consider the market value of share at year end ( Here fair value at year end is $ 33 per share).