Entries for equity investments: 20%50% ownership

At a total cost of $2,198,000, Herrera Corporation acquired 140,000 shares of Tran Corp. common stock as a long-term investment. Tran Corp. has 400,000 shares of common stock outstanding, including the shares acquired by Herrera Corporation.

a. Journalize the entries by Herrera Corporation to record the following information: If an amount box does not require an entry, leave it blank.

1. Tran Corp. reports net income of $3,960,000 for the current period.

	Cash, Income of Tran Corp., Interest Revenue, Investment in Tran Corp. Stock, Notes Receivable	$_____	$_____
	Cash, Income of Tran Corp., Interest Revenue, Investment in Tran Corp. Stock, Notes Receivable	$_____	$_____

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2. A cash dividend of $1.70 per common share is paid by Tran Corp. during the current period.

	Cash, Income of Tran, Corp., Interest Revenue, Investment in Tran Corp. Stock, Notes Receivable	$_____	$_____
	Cash, Income of Tran Corp., Interest, Revenue, Investment in Tran Corp. Stock, Notes Receivable	$_____	$_____

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b. Why is the equity method appropriate for the Tran Corp. investment?

An investment amount

a. between 20% and 50%

b. of 35% or less

of the outstanding common stock of the investee is presumed to represent significant influence. The equity method is appropriate when the investor

a. can

b. cannot

exercise significant influence over the investee.