Question

On January 4, 2021, Runyan Bakery paid $340 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 per share on December 15, 2021, and Lavery reported net income of $230 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 $880 million and: a. The fair value of Lavery's depreciable assets, with an average remaining useful life of four years, exceeded their book value by $120 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-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.)

Answer 1

Prepare journal entries as follows:

Credit Debit $340 Event Accounts Title and Explanation 1 Investment in lavery labelling stock Cash (To record the investment) $340 2 No entry 3 Cash (10 million shares x S3 per share) Dividends revenue (To record the dividend income on investment) $30 4 No entry (Depreciation) 5 Unrealized holding loss-NI Fair value adjustment ($34-532)*10 (To record the adjustment to the fair value) $20