At a total cost of $6,290,000, Herrera Corporation acquired 161,000 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 700,000 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):
|
||||
B. | Why is the equity method appropriate for the Tran Corp. investment? |
A. | No | Account Titles and Explanation | Debit | Credit | |
1 | Investment in Tran Corp. Stock | $173,190 | ($753,000 x 161,000/700,000) | ||
Investment income | $173,190 | ||||
(To record income realized from Tran Corp.) | |||||
2 | Cash | $64,400 | (161,000 x $0.40 per share) | ||
Investment in Tran Corp. Stock | $64,400 | ||||
(To record dividend realized from Tran Corp.) | |||||
Working | |||||
Investment percentage = 161,000 shares/700,000 shares = 23% | |||||
B. | An investment amount between 20% to 50% of outstanding common stock of investee company | ||||
represents significant influence. When there is significant influence then equity method is appropriate | |||||
At a total cost of $6,290,000, Herrera Corporation acquired 161,000 shares of Tran Corp. common stock...
Instructions At a total cost of $6,290,000, Hra Corporation acquired 161,000 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 700,000 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...
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