FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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At a total cost of $1,251,600, Herrera Corporation acquired 84,000 shares of Tran Corp. common stock as a long-term investment. Tran Corp. has 300,000 shares of common stock outstanding, including the shares acquired by Herrera Corporation.
a.
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1. Tran Corp. reports net income of $2,250,000 for the current period.
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2. A cash dividend of $1.60 per common share is paid by Tran Corp. during the current period.
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b. Why is the equity method appropriate for the Tran Corp. investment?
An investment amount
of the outstanding common stock of the investee is presumed to represent significant influence. The equity method is appropriate when the investor
exercise significant influence over the investee.
Expert Solution
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Step 1: Introduction:
Stocks are the shares that represent fractional ownership in the company. Share of net income will be debited to investment account and will be credited to investment income account.
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