Question

At a total cost of $5,600,000, Herrera Corporation acquired 280,000 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 800,000 shares of common stock outstanding, including the shares acquired by Herrera Corporation. a. Journalize the entries by Herrera Corporation to record the following information:

Answer 1

1.

Date Account title Debit Credit

Dec. 31 Investment in Tran Corp. $210,000

Investment Income $210,000

Working:

Herrera owns 280,000 out of 800,000 Tran Corp shares so they will recognize:

= 280,000/800,000 * 600,000

= $210,000 of Tran Corp. net income.

2.

Date Account title Debit Credit

Dec. 31 Cash $140,000

Investment in Tran Corp. $140,000

Working

Cash received as dividend = 0.5 * 280,000 share

= $140,000