Reference no: EM132762531

On January 4, 2021, Runyan Bakery paid $350 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 $3.50 per share on December 15, 2021, and Lavery reported net income of $280 million for the year ended December 31, 2021. The market value of Lavery's common stock at December 31, 2021, was $33 per share.

On the purchase date, the book value of Lavery's identifiable net assets was $930 million and:

1. The fair value of Lavery's depreciable assets, with an average remaining useful life of six years, exceeded their book value by $60 million.
2. The remainder of the excess of the cost of the investment over the book value of net assets purchased was attributable to goodwill.

Required:

Problem 1: Prepare appropriate journal entries related to the investment during 2021, assuming Runyan accounts for this investment by the equity method.

Problem 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.