Question:
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At a total cost of $660,000, Penn Corporation acquired 60,000 shares of Teller Corp. common stock as a long-term investment. Penn Corporation uses the equity method of accounting for this investment. Teller Corp. has 200,000 shares of common stock outstanding, including the shares acquired by Penn Corporation.
Journalize the entries by Penn Corporation to record the following information:
a. Teller Corp. reports net income of $940,000 for the current period.
b. A cash dividend of $2.50 per common share is paid by Teller Corp. during the current period.
c. Why is the equity method appropriate for the Teller Corp. investment?