On January 4, 2018, Runyan Bakery paid $352 million for 10 million shares of Lav

Question

On January 4, 2018, Runyan Bakery paid $352 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 $2.00 per share on December 15, 2018, and Lavery reported net income of $290 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 $940 million and: a. The fair value of Lavery's depreciable assets, with an average remaining useful life of nine years, exceeded their book value by $90 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. Prepare all appropriate journal entries related to the investment during 2018, assuming Runyan accounts for this investment by the equity method 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.

Explanation / Answer

SOLUTION

Requirement 1-

Equity in investee company = (Fair value of investment - Book value of investment) / 9 years

= {[(940m+90m)*30%] -[940m*30%]} / 9 years

= (309m - 282m) / 9 years

= 27 m / 9 years = 3 m

Requirement 2-

Fair value adjustment = Fair value - Amortized cost

= (Fair market value per share * 10 million shares) - 352 millions

= ($34 * 10 m shares) - 352 m

= 340 - 352 = 12m loss

Date Accounts titles and Explanation Debit ($ in millions) Credit ($ in millions) Jan.4 Investment in Lavery Labelling Shares 352 Cash 352 (To record the investment made in Lavery Labelling Shares) Dec.15 Cash (10m shares * $2) 20 Investment in Lavery Labelling Shares 20 (To record the dividend received for Investment made in Lavery Labelling Shares) Dec.31 Investment in Lavery Labelling Shares (290m*30%) 87 Revenue from Investment in Lavery Labelling Shares 87 (To record the income share of 30% Investment madein Lavery Labelling Shares) Dec.31 Equity in investee company 3 Investment in Lavery Labelling Shares 3 (To record the depreciation adjustment of asset over 9 years)

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