Question

On January 4, 2018, Runyan Bakery paid $358 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 $3.50 per share on December 15, 2018, and Lavery reported net income of $320 million for the year ended December 31, 2018. The market value of Lavery's common stock at December 31, 2018, was $34 per share. On the purchase date, the book value of Lavery's net assets was $970 million and a. The fair value of Lavery's depreciable assets, with an average remaining useful life of 7 years, exceeded their book value by $70 million b. The remainder of the excess of the cost of the investment over the book value of net assets purchased was attributable to goodwil Required: 1-a. Prepare all appropriate journal entries related to the investment during 2018, assuming Runyan accounts for this investment unde the fair value option, and accounts for the Lavery investment in a manner similar to what it would use for securities for which there is not significant influence. 1-b. Calculate the effect of these journal entries on 2018 net income, and the amount at which the investment is carried in the December 31, 2018, balance sheet. 2-a. Prepare all appropriate journal entries related to the investment during 2018, assuming Runyan accounts for this investment unde the fair value option, but uses equity method accounting to account for Lavery's income and dividends, and then records a fair value adjustment at the end of the year that allows it to comply with GAAP 2-b Calculate the effect of these journal entries on 2018 net income, and the amount at which the investment is carried in the December 31, 2018, balance sheet. Complete this question by entering your answers in the tabs below. Reg 1A Req 1B Req 2A Req 2B

Answer 1

Dear Student,

If any doubts then feel free to ask.

Part 1 A

Event	General journal	debit	credit
1	Investment in Lavery Labeling shares	358
	Cash		358
2	No journal entry required
	No journal entry required
3	Cash(10 million shares x $3.5)	35
	Dividend revenue		35
4	No journal entry required
	No journal entry required
5	Unrealized holding loss—NI	18
	Fair value adjustment ([10 million shares x $34] – $358 million)		18

Par1 B

Effect on net income (35-18)	$7	million
Investment	$340	million

Part 2

Event	General journal	debit	credit
1	Investment in Lavery Labeling shares	358
	Cash		358
2	Investment in Lavery Labeling shares	96
	Investment revenue (320*30%)		96
3	Cash(10 million shares x $3.5)	35
	Investment in Lavery Labeling shares		35
4	Investment revenue (70*30%)/7	3
	Investment in Lavery Labeling shares		3
4	Unrealized holding loss—NI ([10 million shares x $34] – $358 million)+96-35-3	76
	Fair value adjustment		76

Par 2 B

Effect on net income (35-18)	$7	million
Investment	$340	million