Reference no: EM133000710

On January 4, 2020, Garcia Corporation purchased 30% of the outstanding voting common stock of Herman Company for $610,000. This purchase gave Garcia the ability to exercise significant influence over the operating and financial policies of Herman. On the date of purchase, Herman's books reported assets of $3,000,000 and liabilities of $800,000. Any excess of cost over book value of Garcia's investment was attributed to a patent with a remaining useful life of ten years. During 2020, Herman reported net income of $295,000 and declared and paid cash dividends of $80,000. In the following year, 2021, Herman reported net income of $325,000 and declared and paid cash dividends of $75,000.

In 2020, Garcia sold inventory costing $55,000 to Herman for $70,000. Herman sold 65% of that inventory to outsiders during 2020 with the remainder being sold in 2021. During 2021, Garcia sold inventory costing $45,000 to Herman for $85,000. Herman sold 90% of that inventory to outsiders during 2021.

Problem 1: Prepare all of Garcia's journal entries for 2020 to apply the equity method.