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

Purchases Investment in Lavery Cash common shares $349009000 $ 342,000,000 Net Income: Investment in Lavery common shares & 72,000,000 (30% of 240 million) Investment Revenue 72,000,000 Dividends ($3.5 per share payout * lomillion shares) Cash - 35.000000 Investment in Lavery common shares 35000000 Depreciation adjustment: (blomillien *304 5 years) Investment Revenue 6000,000 Investment in lavery common shares S000 000 TEV: doljusting Entry!- which is not required using EQUITY METHOD Net asset purchased Difference Cost $342 Goodwill-342 - 297 $990 * 30% - 297 = $45 million BV? $8.90* 304 - 267_ endesvaluation of depreciable asset 297-267 - 130

Purchase: Investment in Lavery commose shares Cash 392000000 342,000,000 Net Income: No Jornal entry required (no significant influence) Dividends - Clomillion shares * $3:5per) Cash |_35.00ycoo Incestorent Revenue 35,000,000 Adjusting Entery. ($31 per share * 10 million shares) – $342 z (32009000) Net barealized holding gains anel losses – OCI 32000,000 faire adjustment value 32,000,000