REFERENCE: Ref.01_05
Dodge,Incorporated acquires 15% of Gates Corporation on January 1,2007,for $105,000 when the book value of Gates was $600,000.During 2007 Gates reported net income of $150,000 and paid dividends of $50,000.On January 1,2008,Dodge purchased an additional 25% of Gates for $200,000.Any excess cost over book value is attributable to goodwill with an indefinite life.The fair-value method was used during 2007 but Dodge has deemed it necessary to change to the equity method after the second purchase.During 2008 Gates reported net income of $200,000 and reported dividends of $75,000.
-The income reported by Dodge for 2008 with regard to the Gates investment is

Question

Quizplus · Accepted Answer

The correct answer is A because the equity method is used to account for the investment in Gates Corporation. Under the equity method, Dodge would recognize its share of Gates' net income (15% in 2007 and 40% in 2008) as income. In 2007, Dodge's share of Gates' net income would be $150,000 x 15% = $22,500. In 2008, Dodge's share of Gates' net income would be $200,000 x 40% = $80,000. Therefore, Dodge's total income from the Gates investment for 2008 would be $80,000.

REFERENCE: Ref.01_05 Dodge,Incorporated Acquires 15% of Gates Corporation on January 1,2007,for $105,000