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.
Required:
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):
1. Tran Corp. reports net income of $600,000 for the current period.
2. A cash dividend of $0.50 per common share is paid by Tran Corp. during the current period.
B. Why is the equity method appropriate for the Tran Corp. investment?
