At a total cost of $6,700,000, Herrera Corporation acquired 238,000 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 net income of $967,000 for the current period.2. A cash dividend of $0.29 per common share is paid by Tran Corp. during the current period.B. Why is the equity method appropriate for the Tran Corp. investment?

Question
Asked Nov 16, 2019

At a total cost of $6,700,000, Herrera Corporation acquired 238,000 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 net income of $967,000 for the current period.
2.
A cash dividend of $0.29 per common share is paid by Tran Corp. during the current period.
B.
Why is the equity method appropriate for the Tran Corp. investment?

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Expert Answer

Step 1
  1. 1.

 

Journalize the entry to record the income earned:

Debit (S)
Credit ($)
Date
Accounting Title and Explanation
Investment in Tran Corp
[(238,000/S700, 000)x S967,000]
$328,780
Investment income
$328,780
(To record the income earned)
help_outline

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Debit (S) Credit ($) Date Accounting Title and Explanation Investment in Tran Corp [(238,000/S700, 000)x S967,000] $328,780 Investment income $328,780 (To record the income earned)

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Step 2
  1. 2.

 

Journalize the entry to record dividends paid:

...
Accounting Title and
Explanation
Cash [$238,000x $0.29]
Debit (S)
Credit ($)
Date
$69,020
Investment in Tran Corp.
(To record the dividends paid)
$69,020
help_outline

Image Transcriptionclose

Accounting Title and Explanation Cash [$238,000x $0.29] Debit (S) Credit ($) Date $69,020 Investment in Tran Corp. (To record the dividends paid) $69,020

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