Question

ch12 0 On January 4,2012. Runyan Bakery paid $324 illion 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, 2012, and Lavery reported net income of $160 million for the year ended December 31, 2012. The market value of Lavery's common stock at December 31, 2012, was $31 per share. On the purchase date, the book value of Lavery's net assets was $800 million and: a. The fair value of Lavery's depreciable assets, with an average remaining useful life of six years exceeded their book value by $80 million b. The remainder of the excess of the cost of the investment over the book value of net assets purchased was atributable to goodwill Required: 1. Prepare all appropriate journal entries related to the investment during 2012, assuming Runyan accounts for this investment under the fair value option in a manner similar to what they would use for trading securities. (Enter your answers in millions. Leave no cells blank. If no entry is required select "No journal entry required" in the account field and enter zero (0) in the amount field.) General Jounal Purchase Debit Credit Investment in Lavery Labeling shares 324 Cash 324 Net income No No journa Cash 20 Investment revenue 20 Adjusting entry Net unrealized holaing gains and losses-/s 14 Fair value adjustment

Answer 1

2. Increase in net income $6 million

Increase in net income = Investment revenue – Net unrealized holding gains and losses = $20 million - $14 million = $6 million.