Entries for equity investments: 20%50% ownership

At a total cost of $2,112,000, Herrera Corporation acquired 160,000 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 $3,800,000 for the current period.

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a. 1. Calculate the ownership percentage by dividing the acquired shares by the total Tran Corp. shares outstanding. Increase both the investment and income accounts by the ownership percentage times Tran Corp.s net income.

2. A cash dividend of $0.90 per common share is paid by Tran Corp. during the current period.

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a. 2. Reduce the investment and increase cash by the number of shares acquired times dividends paid per share.

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