Accounting 26th Edition by Carl Warren ,Jim Reeve ,Jonathan Duchac

Exercise 46

Equity method for stock investment
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.
a. Journalize the entries by Veravo Corporation to record the following information:
1. Strado Corp. reports net income of $860,000 for the current period.
2. A cash dividend of $0.32 per common share is paid by Strado Corp. during the current period.
b. Why is the equity method appropriate for the Strado Corp. investment