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
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.
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JOURNAL
ACCOUNTING EQUATION
DATE | DESCRIPTION | POST. REF. | DEBIT | CREDIT | ASSETS | LIABILITIES | EQUITY | |
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B. Why is the equity method appropriate for the Tran Corp. investment?
Herreras 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.
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