Question

P 12–11 Fair value option; equity method investments 1012–5, 1012–8 [This problem is a variation of G P 12-10 focusing on the fair value option.] On January 4, 2021, Runyan Bakery paid $324 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 $160 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 $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 attributable to goodwill. Page 708 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.

Answer 1

Date	General Journal	Debit	Credit
4-Jan	Investment in Lavery Shares	324
	Cash		324
15-Dec	Cash	20
	Investment in Lavery Shares		20
	2*10
31-Dec	Investment in Lavery Shares	48
	Investment revenue		48
	160*30%
31-Dec	Investment revenue	4
	Investment in Lavery Shares		4
	30%*(80/6)
31-Dec	No entry required
Date	General Journal	Debit	Credit
4-Jan	Investment in Lavery Shares	324
	Cash		324
15-Dec	Cash	20
	Investment revenue		20
31-Dec	Unrealized holding loss-NI	14
	Fair value adjustment		14
	(324-31*10)
31-Dec	No entry