Final answer:
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