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 balance in the investment account at December 31,2008,is

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The correct answer is A.Dodge acquired 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 balance in the investment account at December 31, 2008, is $370,000.The equity method is used to account for investments in which the investor has significant influence over the investee. Under the equity method, the investor records its share of the investee's net income or loss as an adjustment to the investment account. The investor also records its share of the investee's dividends as a reduction to the investment account.In this case, Dodge has significant influence over Gates because it owns more than 20% of Gates' voting stock. Therefore, Dodge must use the equity method to account for its investment in Gates.The balance in the investment account at December 31, 2008, is $370,000. This is calculated as follows:Initial investment: $105,000Share of Gates' net income for 2007: $150,000 x 15% = $22,500Share of Gates' dividends for 2007: $50,000 x 15% = $7,500Additional investment: $200,000Share of Gates' net income for 2008: $200,000 x 40% = $80,000Share of Gates' dividends for 2008: $75,000 x 40% = $30,000Balance in investment account at December 31, 2008: $105,000 + $22,500 + $7,500 + $200,000 + $80,000 + $30,000 = $370,000

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