Problem 12-10 Investment securities and equity method investments compared [LO12
ID: 2332927 • Letter: P
Question
Problem 12-10 Investment securities and equity method investments compared [LO12-6, 12-7] On January 4, 2018, Runyan Bakery paid $358 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 $3.50 per share on December 15, 2018, and Lavery reported net income of $320 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 $970 million and: a. The fair value of Lavery's depreciable assets, with an average remaining useful life of seven years, exceeded their book value by 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. Complete this question by entering your answers in the tabs belowExplanation / Answer
Requirement 1: Date Account Titles and Explaination Debit Credit 04-Jan-18 Investment in Lavering labeling shares $ 35,80,00,000 Cash $ 35,80,00,000 (Being Investment purchased) 15-Dec-18 Investment in Lavering labeling shares $ 9,60,00,000 Investment Revenue $ 9,60,00,000 (Being Net income recorded ($320 million X 30%)) 31-Dec-18 Cash Investment in Lavering labeling shares $ 3,50,00,000 (Being Dividend Paid ($3.50 X 10 million shares)) $ 3,50,00,000 31-Dec-18 Investment Revenue Investment in Lavering labeling shares $ 30,00,000 (Being depreciation adjusted ($70 million X 30%/7 years) $ 30,00,000 31-Dec-18 No Entry No Entry (No entry required for equity method) Note: Net Assets purchased Difference Cost $358 million Goodwill = $358 million - $312 million = 46 million Fair Value ($970 million + $70 million) X 30% = $312 million Undervaluation of depreciable asset Book value $970 million X 30% = $291 million $312 million - $291 million = 21 million Requirement 2: Account Titles and Explaination Debit Credit 04-Jan-18 Investment in Lavering labeling shares $ 35,80,00,000 Cash $ 35,80,00,000 (Being Investment purchased) 15-Dec-18 No Entry No Entry (No entry required) 31-Dec-18 Cash Investment in Lavering labeling shares $ 3,50,00,000 (Being Dividend Paid ($3.50 X 10 million shares)) $ 3,50,00,000 31-Dec-18 Net unrealized holding gain or loss - oci Fair value adjustment $ 1,80,00,000 (Being Adjustment entry recrded) $ 1,80,00,000 [($34 per share X 10 million shares) - $358 millions] = 18 million