Question

Equity method for stock investment Instructions Chart of Accounts Journal Final Question Instructions Al 6.290.000. Ferrera Corporation acquired 161,000 shares of Tran Corp.common stock as a long term rivestiment. Herrera Cri ses the equity method of accounting for this investment Tran Corp. has 700,000 shares of common stock standing, nudng the shares acquired by Herrera Corporation Required A Journame the entries by Herrera Corporation on December 31 to record the following information refer to the Chart of Accounts for exact wording of accounts 1 Tran Corp. reports ner income of 3753,000 for Me current penod 2. Acash dividend of $040 per common share is paid by Tran Corp. during the current period. Why is the equity method appropriate for the Tran Corp investment?

Answer 1

WORKING NOTES:
	Calculation of % of shares hold by ferguson company in Silva company
	% of Holding = No. of Shares Acquired / Total number of shares
	% of Holding = 161,000 Shares / 700,000 Shares
	% of Holding =   0.23   or 23%
SOLUTION : A
Journal Entries
Sr. No.	Transaction	Account Title and explanation	Debit	Credit
1	A	Investment in Herrera Corp. ($ 753,000 X 23%)	$1,73,190
		Investment Revenue		$1,73,190
2	B	Cash ($ 161,000 X $ 0.40)	$64,400
		Investment in Herrera Corp.		$64,400
SOLUTION : B
	Equity method is used when there is investment is 20% or more in any organization.
	Herrera corporation is acquired 23% of Tran Corp so best appropriate method is equity method