Problem 12-10 Investment securities and equity method investments compared [L 01
ID: 2549202 • Letter: P
Question
Problem 12-10 Investment securities and equity method investments compared [L 012-6, 12-7) On January 4, 2018, Runyan Bakery paid $332 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 $4.50 per share on December 15, 2018, and Lavery reported net income of $190 million for the year ended December 31, 2018. The market value of Lavery's common stock at December 31, 2018, was $30 per share. On the purchase date, the book value of Lavery's net assets was $840 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 $80 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. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Prepare all appropriate journal entries related to the investment during 2018, assuming Runyan accounts for this investment by the equity method. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in millions. (i.e., 10,000,000 should be entered as 100 View transaction list
Explanation / Answer
Date General Journal Debit Credit 1 Investment in Lavery Labeling shares 332 Cash 332 2 Investment in Lavery labeling shares 57 Investment Revenue 57 190*30% 3 Cash 45 Investment Revenue 45 (10*4.5) 4 Investment revenue 6 Investment in Lavery labeling shares 6 Depreciation adjustment:Investment revenue ([$80 million 30%] /4 years) 5 Net unrealized holding gains and losses—I/S 32 Fair value adjustment 32 332-(10*30)