Dodge, Incorporated acquires 15% of Gates Corporation on January 1, 2011, for $105,000 when the book value of Gates was $600,000. During 2011 Gates reported net income of $150,000 and paid dividends of $50,000. On January 1, 2012, 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 2011 but Dodge has deemed it necessary to change to the equity method after the second purchase. During 2012 Gates reported net income of $200,000 and reported dividends of $75,000. The income reported by Dodge for 2011 with regard to the Gates investment is

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Quizplus · Accepted Answer

Dodge, Incorporated owns 15% of Gates Corporation in 2011, which is not enough to exert significant influence, so the fair-value method is used. Under this method, Dodge would recognize dividend income from Gates. Gates paid dividends of $50,000, and Dodge's share is 15% of that, which is $7,500.

Dodge, Incorporated Acquires 15% of Gates Corporation on January 1