ACC 306 Week 1 P12-10 Runyan Bakery

P1210 - 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 Laverys 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 Laverys common stock at December 31, 2011, was $31 per share. On the purchase date, the book value of Laverys net assets was $800 million and:

a.The fair value of Laverys 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.