On January 4, 2021, Runyan Bakery paid $342 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 $4 per share on
December 15, 2021, and Lavery reported net income of $240 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 $890 million and:
Required:
1-a. Prepare all appropriate journal entries
related to the investment during 2021, assuming Runyan accounts for
this investment under 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 2021 net income, and the amount at which the investment is
carried in the December 31, 2021, balance sheet.
2-a. Prepare all appropriate journal entries
related to the investment during 2021, assuming Runyan accounts for
this investment under 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 2021 net income, and the amount at which the investment is
carried in the December 31, 2021, balance sheet. (Note: You should
end up with the same total 2021 income effect and same carrying
value on the balance sheet for requirements 1 and 2.)
1(a) | Purchase | ||
Debit | Credit | ||
Investment in Lavery common shares | 342,000,000 | ||
Cash | 342,000,000 | ||
Goodwill $75Million | |||
dividend | |||
Cash | 40,000,000 | ||
Investment revenue | 40,000,000 | ||
Fair valuation of investment | |||
Net unrealized holding gains and losses – OCI | 32,000,000 | ||
Investment in Lavery common shares | 32,000,000 | ||
1(b) | Amount of investment is carried in balance sheet | 310,000,000 | |
2(a) | Purchase | ||
Debit | Credit | ||
Investment in Lavery common shares | 342,000,000 | ||
Cash | 342,000,000 | ||
Income share | |||
Investment in Lavery common shares | 72,000,000 | ||
Investment revenue | 72,000,000 | ||
Dividend | |||
Cash | 40,000,000 | ||
Investment in Lavery common shares | 40,000,000 | ||
Fair valuation adjustment | |||
Depreciation adjustment | |||
Investment revenue | 6,000,000 | ||
Investment in Lavery common shares | 6,000,000 | ||
2(b) | Amount of investment is carried in balance sheet | 368,000,000 |
On January 4, 2021, Runyan Bakery paid $342 million for 10 million shares of Lavery Labeling...
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