At a total cost of $6,300,000, Veravo Corporation acquired 210,000 shares of Strado Corp. common stock as a long-term investment. Veravo Corporation uses the equity method of accounting for this investment. Strado Corp. has 700,000 shares of common stock outstanding, including the shares acquired by Veravo Corporation.
Required:
| A. | Journalize the entries by Veravo Corporation on December 31 to record the following information (refer to the Chart of Accounts for exact wording of account titles):
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| B. | Why is the equity method appropriate for the Strado Corp. investment?
B. Why is the equity method appropriate for the Strado Corp. investment? Veravo’s investment in Strado Corp. represents ? of the outstanding shares of Strado Corp. An investment amount between ? and ? 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. |
We have provided with the information that
At a total cost of $6,300,000, Veravo Corporation acquired 210,000 shares of Strado Corp
Strado Corp. has 700,000 shares of common stock outstanding
Strado Corp. reports net income of $860,000 for the current period
A cash dividend of $0.32 per common share is paid by Strado Corp. during the current period
Now we will pass the gournal entry as follow
210,000 / 700,000) x 860,000=258,000.
| No | Description | Debit | Credit |
| 1 | Investment in Strado Corp | 258000 | |
| To Investment Income | 258000 |
Now devidend entry will be passes as follow
210,000 x 0.32 =67,200
| No | Description | Debit | Credit |
| 1 | Cash | 67200 | |
| To Investment in Strado Corp | 67200 |
( B) Why is the equity method appropriate for the Strado Corp. investment
Because Veravo’s owns [210,000/ 700,000] 30% of Strado Corp
Veravo’s investment in Strado Corp. represents 30% of holding of the outstanding shares of Strado Corp
An investment amount between 20 and 40 of the outstanding common stock of the investee is presumed to represent significant influence
So the given statement is true that The equity method is when the investor can exercise significant influence over the investee.
