Question

On January 4, 2021, Runyan Bakery paid $360 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 $4.50 per share on December 15, 2021, and Lavery reported net income of $330 million for the year ended December 31, 2021. The market value of Lavery's common stock at December 31, 2021, was $32 per share. On the purchase date, the book value of Lavery's identifiable net assets was $980 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. 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

ANS :-

Requirement 1 :-

Journal Entry ( $in Million)
S. No.	Account Title	Debit	Credit
1	Investment in Lavery Labeling Shares	360000000
	Cash		360000000
	( TO Record Purchase of Investment)
2	Investment in Lavery Labeling Shares	99000000
	Investment Revenue ($330mill*30%)		99000000
	( To Record Share in net Income )
3	Cash (10 million*$4.50)	45000000
	Investment in Lavery Labeling Shares		45000000
	( to Record Dividend Received)
4	Depreciation adjustment :($80 million *30%/6years)
	Investment Revenue	4000000
	Investment in Lavery Labeling Shares		4000000
	( To Record Depreciation Adjustment)

Requirement 2 :-

Journal Entry ( $in Million)
S.No.	Account Title	Debit	Credit
1	Investment in Lavery Labeling Shares	360000000
	Cash		360000000
	( TO Record Purchase of Investment)
2	No Entry
	( no Significant Influesnce)
3	Dividends : Cash (10 Million *$4.50)	45000000
	Investment in Lavery Labeling Shares		45000000
	( to Record Dividend Received)
4	Adjusted Entry : Net Unrealised Holding Gain and Loss [($32*10million) - $360	40,000,000
	Fair Value adjustment		40,000,000
	To Record Loss due to decrease in Fair Value