Chapter 12, Problem 12.10P

Investment securities and equity method investments compared

• LO12-6, LO12-7

On January 4, 2018, Runyan Bakery paid $324 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 $160 million for the year ended December 31, 2018. The market value of Lavery’s common stock at December 31, 2018, was $31 per share. On the purchase date, the book value of Lavery’s net assets was $800 million and:

a. The fair value of Lavery’s depreciable assets, with an average remaining useful life of six 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.