On January 4, 2011, Runyan Bakery paid $324 million for 10 million shares of Lavery Labeling Company common stock

P 12-10 Fair value option; equity method investments

[This problem is a variation of Problem 12-9 focusing on the fair value option.]

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. What would be the effect of this investment on Runyan's 2011 net income?

Click here for the solution: On January 4, 2011, Runyan Bakery paid $324 million for 10 million shares of Lavery Labeling Company common stock

At Camden Manufacturing Company, production workers in the Painting Department are paid on the basis of productivity

At Camden Manufacturing Company, production workers in the Painting Department are paid on the basis of productivity. The labor time standard of a unit of production is established through periodic time studies conduct by the Lowery Management Department. In a time study, the actual time required to complete a specific task by a worker is observed. Allowances are then made for preparation time, rest periods, and clean-up time. Ron Orlano is one of several veterans in the Painting Department. Ron is informed by Lowery Management that he will be used in the time study for the painting of a new product. The findings will be the basis for establishing the labor time standard for the next 6 months. During the test, Ron deliberately slows his normal work pace in an effort to obtain a labor time standard that will be easy to meet. Because it is a new product, the Lowery Management representative who conducted the test is unaware that Ron did not give the test his best effort.

1. Who was benefited and who was harmed by Ron's action
2. Was Ron ethical in the way he performed the time study test?
3. What measure(s) might the company take to obtain valid data for setting the labor time standard?

Click here for the solution: At Camden Manufacturing Company, production workers in the Painting Department are paid on the basis of productivity

Georgia Lazenby believes a current liability is a debt that can be expected to be paid in one year

Georgia Lazenby believes a current liability is a debt that can be expected to be paid in one year. Is Georgia correct? Explain.


Click here for the solution: Georgia Lazenby believes a current liability is a debt that can be expected to be paid in one year

Greenwood Corporation has paid 60 consecutive quarterly cash dividends (15 years)

Greenwood Corporation has paid 60 consecutive quarterly cash dividends (15 years). The last 6 months have been a real cash drain on the company, however, as profit margins have been greatly narrowed by increasing competition. With a cash balance sufficient to meet only day-to-day operating needs, the president, Gil Mailor, has decided that a stock dividend instead of a cash dividend should be declared. He tells Greenwood’s financial vice-president, Vicki Lemke, to issue a press release stating that the company is extending its consecutive dividend record with the issuance of a 5% stock dividend. “Write the press release convincing the stockholders that the stock dividend is just as good as a cash dividend,” he orders. “Just watch our stock rise when we announce the stock dividend; it must be a good thing if that happens.”

Instructions
(a) Who are the stakeholders in this situation?
(b) Is there anything unethical about president Mailor’s intentions or actions?
(c) What is the effect of a stock dividend on a corporation’s stockholders’ equity accounts? Which would you rather receive as a stockholder—a cash dividend or a stock dividend? Why?


Click here for the solution: Greenwood Corporation has paid 60 consecutive quarterly cash dividends (15 years)

Stan Sewell paid $50,000 for a franchise that entitled him to market software programs in the countries of the European Union

Stan Sewell paid $50,000 for a franchise that entitled him to market software programs in the countries of the European Union. Sewell intended to sell individual franchises for the major language groups of Western Europe—German, French, English, Spanish, and Italian. Naturally, investors considering buying a franchise from Sewell asked to see the financial statements of his business.

Believing the value of the franchise to be $500,000, Sewell sought to capitalize his own franchise at $500,000. The law firm of St. Charles & LaDue helped Sewell form a corporation chartered to issue 500,000 shares of common stock with par value of $1 per share. Attorneys suggested the following chain of transactions:

a. Sewell's cousin, Bob, borrows $500,000 from a bank and purchases the franchise from Sewell.
b. Sewell pays the corporation $500,000 to acquire all its stock.
c. The corporation buys the franchise from Cousin Bob.
d. Cousin Bob repays the $500,000 loan to the bank.

In the final analysis, Cousin Bob is debt-free and out of the picture. Sewell owns all the corporation's stock, and the corporation owns the franchise. The corporation's balance sheet lists a franchise acquired at a cost of $500,000. This balance sheet is Sewell's most valuable marketing tool.

1. What is unethical about this situation?
2. Who can be harmed? How can they be harmed? What role does accounting play?


Click here for the solution: Stan Sewell paid $50,000 for a franchise that entitled him to market software programs in the countries of the European Union

Ken paid the following amounts for interest during 2010

Ken paid the following amounts for interest during 2010:

Qualified interest on home mortgage $4,700
Auto loan interest 850
“Points" on the mortgage for acquisition of his 300 personal residence
Service charges on his checking account 40
Mastercard interest 300

Calculate Ken's itemized deduction for interest on Schedule A.


Click here for the solution: Ken paid the following amounts for interest during 2010

Jill Loomis believes a current liability is a debt that can be expected to be paid in one year

1. Jill Loomis believes a current liability is a debt that can be expected to be paid in one year. Is Jill correct? Explain.

2. Frederickson Company obtains $40,000 in cash by signing a 9%, 6-month, $40,000 note payable to First Bank on July 1. Frederickson’s fiscal year ends on September 30. What
information should be reported for the note payable in the annual financial statements?


Click here for the solution: Jill Loomis believes a current liability is a debt that can be expected to be paid in one year

Del Hardware has four employees who are paid on an hourly basis plus time-and-a half for all hours worked in excess of 40 a week

Problem 11-3A (P11-3A) Del Hardware has four employees who are paid on an hourly basis plus time-and-a half for all hours worked in excess of 40 a week. Payroll data for the week ended March 15, 2010, are presented below.

Employee Hours Hourly Rate Federal Income Tax Withholdings United Fund
Joe Devena 40 $ 15 $ 5
Mary Keener 42 $ 15 $ 5
Andy Dye 44 $ 13 $ 60 $ 8
Kim Shen 46 $ 13 $ 61 $ 5

Devena and Keener are married. They claim 0 and 4 withholding allowances, respectively. The following tax rates are applicable: FICA 8%, state income taxes 3%, state unemployment taxes 5.4%, and federal unemployment 0.8%. The first three employees are sales clerks (store wages expense). The fourth employee performs administrative duties (office wages expense).

Instructions
a. Prepare a payroll register for the weekly payroll. (Use the wage-bracket withholding table in the text for federal income tax withholdings.)
b. Journalize the payroll on March 15, 2010, and the accrual of employer payroll taxes.
c. Journalize the payment of the payroll on March 16, 2010.
d. Journalize the deposit in a Federal Reserve bank on March 31, 2010, of the FICA and federal income taxes payable to the government.

Click here for the solution: Del Hardware has four employees who are paid on an hourly basis plus time-and-a half for all hours worked in excess of 40 a week