1) 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?

2) On January 4, Year 1, Ferguson Company purchased 96,000 shares of Silva Company directly from one of the founders for a price of $57 per share. Silva has 300,000 shares outstanding, including the Daniels shares. On July 2, Year 1, Silva paid $235,000 in total dividends to its shareholders. On December 31, Year 1, Silva reported a net income of $863,000 for the year. Ferguson uses the equity method in accounting for its investment in Silva.

a.Provide the Ferguson Company journal entries for the transactions involving its investment in Silva Company during Year 1.

b.Determine the December 31, Year 1, balance of Investment in Silva Company Stock.