Answered Essay: On January 4, 2018, Runyan Bakery paid $346 million for 10 million shares of Lavery Labeling Com

On January 4, 2018, Runyan Bakery paid $346 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, 2018, and Lavery reported net income of $260 million for the year ended December 31, 2018. The market value of Lavery’s common stock at December 31, 2018, was $32 per share. On the purchase date, the book value of Lavery’s net assets was $910 million and:

The fair value of Lavery’s depreciable assets, with an average remaining useful life of [a(27)] years, exceeded their book value by $60 million.

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 2018, 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 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 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 2018 net income, and the amount at which the investment is carried in the December 31, 2018, balance sheet.

Req. 1A

Journal entry worksheet 2 3 4 5 Record the purchase of Lavery Labeling stock for $346 million. Note: Enter debits before credits. Event General Journal Debit Credit Investment in Lavery Labeling shares 346 Cash 346 Record entry Clear entry View general journal

I think I made a couple of mistakes on the problem, but I’m not sure what is wrong specifically.Journal entry worksheet 2 3 4 5 Record the purchase of Lavery Labeling stock for $346 million. Note: Enter debits before credits. Event General Journal Debit Credit Investment in Lavery Labeling shares 346 Cash 346 Record entry Clear entry View general journal

 

Expert Answer

 

  1. Prepare all appropriate journal entries related to the investment during 2018, assuming Runyan accounts for this investment under the fair value option in a manner similar to what they would use for trading securities.

Solution:

 

Event General Journal Debit (in million) Credit
1 Investment in Lavery Labelling Shares                           346.00
     Cash    346.00
(Runyan Bakery paid $346 million for 10 million shares)
2 No Journal entry required
3 Cash                             30.00
     Investment Revenue      30.00
(Dividend of $3 per share for 10 million shares)
4 Net unrealized holding gains and losses – I / S                             26.00
     Fair Value Adjustments      26.00
(Market value of shares $32 per * 10 million shares)
($32 * 10 million – $346 million)
  1. What would be the effect of this investment on Runyan’s 2018 net income?

Solution:

                Total Effect = $4 million

Because Runyan is accounting for the Lavery investment under the fair value option, the unrealized holding loss would be included in 2018 net income. Therefore, total effect on net income would be $30 million – $26million, or $4 million

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