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):

1.	Tran Corp. reports net income of $722,000 for the current period.
2.	A cash dividend of $0.33 per common share is paid by Tran Corp. during the current period.

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.