Question

Zoop Corporation purchased for $300,000 a 30% interest in Murphy, Inc. This investment enables

Zoop to exert significant influence over Murphy. During the year, Murphy earned net income of $180,000
and paid dividends of $60,000. Prepare Zoop's journal entry for the purchase of this investment.

Answer 1

Zoop Corporation should debit Investment in Murphy, Inc. for $300,000 and credit Cash for the same amount to record the initial purchase of its 30% interest under the equity method.

Step-by-step explanation:

The student's question pertains to accounting for an investment in an associate where the investor has significant influence over the investee. Since Zoop Corporation has a 30% interest and can exert significant influence, it should use the equity method to account for its investment in Murphy, Inc. For the initial purchase, Zoop would make the following journal entry:

• Debit Investment in Murphy, Inc. $300,000
• Credit Cash $300,000

Under the equity method, Zoop would recognize its share of Murphy's net income and dividend distributions. However, the student only asked for the initial purchase entry.

Answer 2

Zoop Corporation, using the equity method, records the $300,000 purchase of a 30% interest in Murphy, Inc. with a debit to Investment and a credit to Cash. Subsequently, Zoop records its share of Murphy's net income with a debit to the Investment account and a credit to Income, and records dividends received by decreasing the Investment account and increasing Cash.

Step-by-step explanation:

Zoop Corporation's purchase of a 30% interest in Murphy, Inc. indicates that Zoop can use the equity method for accounting for this investment due to its ability to exert significant influence over Murphy. Since Zoop owns 30% of Murphy, it must recognize 30% of Murphy's net income and dividends.

The journal entry to record the purchase would be:

• Investment in Murphy, Inc. Dr 300,000
• Cash Cr 300,000

This reflects the cash outflow of $300,000 to acquire the shares. Additionally, Zoop needs to recognize its share of Murphy's income. The entry for this would be:

• Investment in Murphy, Inc. Dr 54,000 (which is 30% of $180,000)
• Income from Murphy, Inc. Cr 54,000

Also, when Murphy pays dividends, Zoop's investment account should be reduced. The entry for the dividend should be:

• Cash Dr 18,000 (which is 30% of $60,000)
• Investment in Murphy, Inc. Cr 18,000