Question

On January 4, 2021, Runyan Bakery paid $362 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 $4.00 per share on December 15, 2021, and Lavery reported net income of $340 million for the year ended December 31, 2021. The market value of Lavery's common stock at December 31, 2021, was $33 per share. On the purchase date, the book value of Lavery's identifiable net assets was $990 million and:

1. The fair value of Lavery's depreciable assets, with an average remaining useful life of nine years, exceeded their book value by $90 million.
2. 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.

Record the purchase of Lavery Labeling stock for $362 million.

Record Runyan Bakery's share of Lavery's $340 million net income.

Record the receipt of cash dividends of $4 per share on 10 million shares.

Record any necessary entry related to depreciation. The fair value of Lavery's depreciable assets, with an average remaining useful life of nine years, exceeded their book value by $90 million.

Record any necessary adjusting entry to correctly report the investment on the balance sheet. The market value of Lavery's common stock at December 31, 2021 was $33 per share.

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.

Record the purchase of Lavery Labeling stock for $362 million.

Record Runyan Bakery's share of Lavery's $340 million net income.

Record the receipt of cash dividends of $4 per share on 10 million shares.

Record any necessary adjusting entry to correctly report the investment on the balance sheet. The market value of Lavery's common stock at December 31, 2021 was $33 per share.

Answer 1

DAnswes- credit LE Debit Particulars Purchase '. Investment in Lavery Common shave sAk 362,000,000 362,000, 000 To ash Net Income '. Gmmen shares Ak o 102,000,00 Jnuestment in Lavery (30%, x34 om To Inuestment Revenue 102 000,000 Dividends :($4 per share payout X to million shae) A/C Dr Cash 40,000,00O 40,000,000 To Investment in Lavery Gmmon sharg Depreciation adjustment :(890 million x 30) Investment revenue 3,000,600 Alc Dr To Investment in Lauery GmmGN Sharey 3,000, 000 Aljusting entry : Not mguéred using eguity melhod 2) Particulars LF Debit credit Purcha se : Invest ment in laverg Gmmon Shares Alc Dr 362,000, 000 362,000,00G To Cash Net Income : No journal entry reguired (no sijnifiant influence) Dividends: ($4 per share payout x 1o million shno) Cash Ale 40,00, 000 To Investment in Lavery |adjusting entry: $33 per sharexiomillonshare) -$ 362 m) Net unrealised holding goingand oses-OCI Gmmon shade 40,000, 000 ३,c00,c00 To fair adjustment valve 32,000,000