p$12-12$

Fairvalue option;

equity method

investments;

frnancial

statement effects

L$012-5,$ L$012-6,$

L$012-7,$ LO$12-8$

$$

$[$This problem is an expanded version of $P12-11$ that considers alternative ways in which a firm might apply the

fair value option to account for significant$-$influence investments that would normally be accounted for under the

equity method.$]$

Companies can choose the fair value option for investments that otherwise would be accounted for under the

equity method. If the fair value option is chosen, the investment is shown at fair value in the balance sheet, and

unrealized holding gains and losses are recognized in the income statement. However, exactly how a company

complies with those broad requirements is up to the company. This problem requires you to consider alternative

ways in which a company might apply the fair value option for investments that otherwise would be accounted

for under the equity method.

On January $4,2024,$ 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\mathrm{.}00$ per share on December $15,2024,$ and Lavery reported net

income of $$160$ million for the year ended December $31,2024.$ The market value of Lavery's common stock at

December $31,2024,$ was $$31$ per share. On the purchase date, the book value of Lavery's identifiable 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:

Prepare all appropriate journal entries related to the investment during $2024,$ assuming Runyan accounts for

this investment under the fair value option, and accounts for the Lavery investment in a manner similar to

what it would use for securities for which there is not significant influence. Indicate the effect of these journal

entries on $2024$ net income, and indicate the amount at which the investment is carried in the December $31,$

$2024,$ balance sheet.

Prepare all appropriate journal entries related to the investment during $2024,$ assuming Runyan accounts for

this investment under the fair value option, but uses equity method accounting to account for Lavery's income

and dividends, and then records a fair value adjustment at the end of the year that allows it to comply with

GAAP. Indicate the effect of these journal entries on $2024$ net income, and indicate the amount at which the

investment is carried in the December $31,2024,$ balance sheet. $($Note: You should end up with the same total

$2024$ income effect and same carrying value on the balance sheet for requirements $1$ and $2.)$