At a total cost of $6,030,000, Herrera Corporation acquired 224,000 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 800,000 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. 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.
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JOURNAL
ACCOUNTING EQUATION
DATE | DESCRIPTION | POST. REF. | DEBIT | CREDIT | ASSETS | LIABILITIES | EQUITY | |
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1 |
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2 |
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3 |
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4 |
B. Why is the equity method appropriate for the Tran Corp. investment?
Herrera’s investment in Tran Corp. represents of the outstanding shares of Tran Corp. An investment amount between and of the outstanding common stock of the investee is presumed to represent significant influence. The equity method is when the investor can exercise significant influence over the investee.
% of ownership | 224000/800000 = 28% | |||||||
A | ||||||||
Date | Description | Post ref. | Debit | Credit | Assets | Liabilities | Equity | |
December 31 | Investment in Tran Corp. stock | 261240 | ↑ | =933000*28% | ||||
Income of Tran Corp. | 261240 | ↑ | ||||||
December 31 | Cash | 60480 | ↑ | =224000*0.27 | ||||
Investment in Tran Corp. stock | 60480 | ↓ | ||||||
B | ||||||||
Herrera’s investment in Tran Corp. represents 28% of the outstanding shares of Tran Corp. An investment amount between 20% and 50% of the outstanding common stock of the investee is presumed to represent significant influence. The equity method is appropriate when the investor can exercise significant influence over the investee. |
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