At a total cost of $6,360,000, Herrera Corporation acquired 285,000 shares of Tr

Question

At a total cost of $6,360,000, Herrera Corporation acquired 285,000 shares of Tran Corp. common stock as a long-term investment. Herrera Corporation uses the equity method of accounting for this investment. Tran Corp. has 750,000 shares of common stock outstanding, including the shares acquired by Herrera Corporation.

Required:

A. Journalize the entries by Herrera Corporation on December 31 to record the following information (refer to the Chart of Accounts for exact wording of account titles): 1. Tran Corp. reports net income of $802,000 for the current period. 2. A cash dividend of $0.39 per common share is paid by Tran Corp. during the current period. B. Why is the equity method appropriate for the Tran Corp. investment? netricors

Explanation / Answer

SOLUTION

(A) Journal Entries

(B) Equity method is appropriate for the Tran Corp. investment because Herrera owns 38% (285,000 / 750,000) of Tran Corp.

S.No. Account titles and Explanation Debit ($) Credit ($) 1. Investment in Tran Corp 304,760 Investment Income (285,000/750,000*$802,000) 304,760 (To record the investment in Tran corp.) 2. Cash (285,000 * $0.39) 111,150 Investment in Tran Corp 111,150 (To record the payment of cash dividend)

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