Question

On January 4, 2021, Runyan Bakery paid $356 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 $2.40 per share on December 15, 2021, and Lavery reported net income of $310 million for the year ended December 31, 2021. The market value of Lavery's common stock at December 31, 2021, was $35 per share. On the purchase date, the book value of Lavery's identifiable net assets was $960 million and: The fair value of Lavery's depreciable assets, with an average remaining useful life of four years, exceeded their book value by $80 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. Prepare all appropriate journal entries related to the investment during 2021, 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.

Answer 1

Based on the information given the appropriate journal entries to record the given transactions are:

1. Runyan Bakery journal entries

1. Debit Investment in equity affiliate $356,000,000  

Credit Cash  $356,000,000  

( To record purchase of Investment)

 

2. Debit Investment in equity affiliate $93,000,000  

Credit Investment Revenue $93,000,000

($310,000,000×30%)  

( To record share in net Income )

 

3. Debit  Cash $24,000,000

(10 million×$2.40)

Credit Investment in equity affiliate $24,000,000

(To record dividend received)

 

4. Depreciation adjustment

Debit Investment Revenue  $6,000,000

($80 million ×30%/4years)  

Credit Investment in equity affiliate$6,000,000

( To record depreciation adjustment)  

 

5. No journal entry required

2. Journal entries

1. Debit Investment in equity securities $356,000,000  

Credit Cash  $356,000,000  

( To record purchase of investment)

 

2. No journal entry required

3. Debit Cash $24,000,000

(10 million×$2.40)

Credit Dividend revenue $24,000,000

( To record dividend received)

 

4. Debit Net Unrealized Holding Gain and Loss $6,000,000

[($35×10million) - $356]

Credit Fair Value adjustment $6,000,000

(To record Loss due to decrease in fair Value)  

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