FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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**Accounting Journal Entries for Equity Method**

Land Services, Inc. owns 32% of the voting stock of World Investments, Inc. During the year 2024, World Investments, Inc. earned profits of $250,000. Using the equity method, which of the following journal entries should Land Services record?

1. **Option A**
   - Debit: Cash $80,000
   - Credit: Equity Investments—World Investments, Inc. $80,000

2. **Option B**
   - Debit: Cash $80,000
   - Credit: Dividend Revenue $80,000

3. **Option C**
   - Debit: Equity Investments—World Investments, Inc. $80,000
   - Credit: Revenue from Investments $80,000

4. **Option D**
   - Debit: Equity Investments—World Investments, Inc. $250,000
   - Credit: Cash $250,000

**Explanation of Correct Entry:**

- When using the equity method, the investor recognizes a share of the investee’s profits. Since Land Services owns 32%, they would recognize 32% of $250,000 in profits, which is $80,000. The correct entry would involve increasing the investment account by this amount, signifying an increase in ownership equity resulting from the investee's profits. There is no cash exchange involved directly in recording this share of profits.

**Analysis:**

- **Option A** incorrectly suggests exchanging cash for an increase in the investment account, rather than recognizing the earnings.
- **Option B** treats the earnings as dividend revenue, which is not consistent with the equity method.
- **Option C** correctly represents the increase in the investment account.
- **Option D** reflects an incorrect transaction as it suggests a cash transaction for the entire profit, which does not occur under the equity method.
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Transcribed Image Text:**Accounting Journal Entries for Equity Method** Land Services, Inc. owns 32% of the voting stock of World Investments, Inc. During the year 2024, World Investments, Inc. earned profits of $250,000. Using the equity method, which of the following journal entries should Land Services record? 1. **Option A** - Debit: Cash $80,000 - Credit: Equity Investments—World Investments, Inc. $80,000 2. **Option B** - Debit: Cash $80,000 - Credit: Dividend Revenue $80,000 3. **Option C** - Debit: Equity Investments—World Investments, Inc. $80,000 - Credit: Revenue from Investments $80,000 4. **Option D** - Debit: Equity Investments—World Investments, Inc. $250,000 - Credit: Cash $250,000 **Explanation of Correct Entry:** - When using the equity method, the investor recognizes a share of the investee’s profits. Since Land Services owns 32%, they would recognize 32% of $250,000 in profits, which is $80,000. The correct entry would involve increasing the investment account by this amount, signifying an increase in ownership equity resulting from the investee's profits. There is no cash exchange involved directly in recording this share of profits. **Analysis:** - **Option A** incorrectly suggests exchanging cash for an increase in the investment account, rather than recognizing the earnings. - **Option B** treats the earnings as dividend revenue, which is not consistent with the equity method. - **Option C** correctly represents the increase in the investment account. - **Option D** reflects an incorrect transaction as it suggests a cash transaction for the entire profit, which does not occur under the equity method.
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