P12–10 - Runyan Bakery - Fair value option; equity method investments ● LO2 LO4 LO7
On January 4, 2011, 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 chose the fair value option to account for this
investment. Runyan received dividends of $2.00 per share on December 15,
2011, and Lavery reported net income of $160 million for the year ended
December 31, 2011. The market value of Lavery’s common stock at
December 31, 2011, 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 2011,
assuming Runyan accounts for this investment under the fair value option
and accounts for the Lavery investment in a manner similar to what they
would use for trading securities.
2. Prepare
the journal entries required by Runyan, assuming that the 10 million
shares represents a 10% interest in the net assets of Lavery rather than
a 30% interest.
