At a total cost of $6,460,000, Herrera Corporation acquired 187,000 shares of Tran Corp. common stock as
Question:
At a total cost of $6,460,000, Herrera Corporation acquired 187,000 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 850,000 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):
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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.
JOURNAL
ACCOUNTING EQUATION
DATE | DESCRIPTION | POST. REF. | DEBIT | CREDIT | ASSETS | LIABILITIES | EQUITY | |
---|---|---|---|---|---|---|---|---|
1 | ||||||||
2 | ||||||||
3 | ||||||||
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 appropriate/inappropriate when the investor can exercise significant influence over the investee.
Financial Accounting an introduction to concepts, methods and uses
ISBN: 978-0324789003
13th Edition
Authors: Clyde P. Stickney, Roman L. Weil, Katherine Schipper, Jennifer Francis