Question

CHART OF ACCOUNTS
Herrera Corporation
General Ledger
ASSETS 110 Cash 111 Petty Cash 120 Accounts Receivable 121 Allowance for Doubtful Accounts 131 Notes Receivable 132 Interest Receivable 141 Merchandise Inventory 145 Office Supplies 146 Store Supplies 151 Prepaid Insurance 161 Investment in Tran Corp. Stock 165 Valuation Allowance for Trading Investments 166 Valuation Allowance for Available-for-Sale Investments 181 Land 191 Store Equipment 192 Accumulated Depreciation-Store Equipment 193 Office Equipment 194 Accumulated Depreciation-Office Equipment LIABILITIES 210 Accounts Payable 221 Notes Payable 231 Interest Payable 241 Salaries Payable 251 Sales Tax Payable EQUITY 311 Common Stock 312 Paid-In Capital in Excess of Par-Common Stock 321 Preferred Stock 322 Paid-In Capital in Excess of Par-Preferred Stock 331 Treasury Stock 332 Paid-In Capital from Sale of Treasury Stock 340 Retained Earnings 350 Unrealized Gain (Loss) on Available-for-Sale Investments 351 Cash Dividends 352 Stock Dividends 390 Income Summary	REVENUE 410 Sales 611 Interest Revenue 612 Dividend Revenue 621 Income of Tran Corp. 631 Gain on Sale of Investments 641 Unrealized Gain on Trading Investments EXPENSES 511 Cost of Merchandise Sold 512 Bad Debt Expense 515 Credit Card Expense 516 Cash Short and Over 520 Salaries Expense 531 Advertising Expense 532 Delivery Expense 533 Repairs Expense 534 Selling Expenses 535 Rent Expense 536 Insurance Expense 537 Office Supplies Expense 538 Store Supplies Expense 561 Depreciation Expense-Store Equipment 562 Depreciation Expense-Office Equipment 590 Miscellaneous Expense 710 Interest Expense 721 Loss of Tran Corp. 731 Loss on Sale of Investments 741 Unrealized Loss on Trading Investments

Instructions At a total cost of s6.300.000. Herrera Corporation acquired 195.000 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 750.000 shares of common stock outstanding, including the shares acquired by Herrera Corporation. Required: .Journallze the entries by Herrera Corporation on December 31 to record the following information (refer to the Chart of Accounts for exact wording of account ttles) 1. Tran Com, reports net income of $928.000 tor the current period. 2. A cash dividend of $0.26 per common share is paid by Tran Coro, during the current period B. Why is the equity method appropriate t the Tran Corp. investment? Journal 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. PAGE 10 ACCOUNTING EQUATION JOURNAL DATE DESCRIPTION POST, REF. DEBIT CREDIT ASSETS LIABILITIES EQUITY 1 Final Question B. Why is the equity method appropriate for the Tran Corp. investment? Herrera's investment in Tran Corp, represents Y and of the outstanding shares of Tran Corp. An investment amount between of the outstanding common stock of the investee is presumed to represent significant influence. The equity method is when the investor can exercise significant influence over the investee.

Answer 1

Number of Shares acquired by Herrera Corporation Total Outstanding Shares of Tran Corp Percentage Acquried By Herrera Corp (195,000/750,000) 195,000 shares 750,000 shares 26% JOURNAL ACCOUNTING EQUATION EQUITY DATE POST.REF DESCRIPTION DEBIT CREDIT ASSETS LIABILITIES 1 December 31 21 Investment in Tran Corp. Stock (928,000 x 26%) 161 241,280 Income of Tran Corp. 621 241.280 (to record 26% share in Tran Corp. Net Income) 3 December 31 Cash (195,000 shares x $0.26) 110 50,700 4 161 Investment in Tran Corp. stock 50,700 (to record the dividend income) Notes Increase Decrease Herrera's Investment in Tran Corp. represents 26 % of the outstanding shares of Tran corp. An Investment amount between 20% and 50 % of the outstanding common stock of the investee is presumed to represent significant infulence. The equity method is appropriate when the investor can exercise significant infulence over the investee