Question

An examination of Margot Company's records indicate that investment income relating to equity method investments was 100,000 and that the related investment account increased by 75,000. Utilizing only one journal entry to determine cash received from the investments, the entry would include:

1) A debit to Cash for 100,000 and a credit to Investment Income for 100,000
2) A debit to Cash for 75,000 and a credit to Investment Income for 75,000
3) A debit to Cash for 100,000 and a credit to Investment Income for 75,000
4) A debit to Cash for 75,000 and a credit to Investment Income for 100,000

Answer 1

The correct journal entry for cash received from equity method investments, when investment income is $100,000 and the investment account increased by $75,000, would debit cash for the dividends received of $25,000 and credit investment income for the income recognized.

Step-by-step explanation:

To determine the correct journal entry for cash received from equity method investments when investment income was $100,000 and the related investment account increased by $75,000, one must understand the nature of transactions under the equity method of accounting. In this method, the investor recognizes their share of the investee's profits as investment income, which increases the carrying value of the investment. However, when dividends are received (cash inflows), they reduce the carrying value of the investment.

In this case, the investment income of $100,000 is recognized, but the investment account increased only by $75,000, which implies that the difference of $25,000 ($100,000 investment income minus $75,000 increase in investment) represents the cash dividends received. Therefore, the correct journal entry would include a debit to Cash for the amount of dividends received (which is $25,000) and a credit to Investment Income to recognize the income received. The entry would include a debit to Cash for $75,000 and a credit to Investment Income for $100,000. This is because the investment income of $100,000 represents the total income earned from the investment, but since the investment account increased by $75,000, it means that $75,000 was received in cash.

Answer 2

The journal entry to record cash received from equity method investments at Margot Company would include a debit to Cash for $75,000 and a credit to Investment Income for $100,000.

Step-by-step explanation:

The question asks about accounting for equity method investments and determining cash received based on given financial information. Margot Company's investment income from equity method investments is $100,000, and the related investment account increased by $75,000.

To make a single journal entry to determine cash received from these investments, the correct entry would be to debit Cash for $75,000 and credit Investment Income for $100,000. The investment income represents the company's share of the investee's earnings, and it is assumed in this scenario that the difference between the investment income recognized and the increase in the investment account ($100,000 - $75,000 = $25,000) reflects Margot Company's share of the investee's earnings that was reinvested in the investee rather than distributed to Margot Company as a cash dividend.