Gerken Company concluded at the beginning of 2016 that the company's ownership interest in DillCo had increased to the point that it became appropriate to begin using the equity method to account for the investment.The balance in the investment account is $50,000 at the time of the change,and accountants working with company records determined that the balance would have been $75,000 if the account had been adjusted for investee net income and dividends as prescribed by the equity method.After implementing the change to the equity method,if financial statements were prepared:

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The balance in the investment account would have been $75,000 if the account had been adjusted for investee net income and dividends as prescribed by the equity method. Therefore, the company has earned $25,000 in equity income for the year ($75,000 - $50,000). The increase in equity income would be reflected in the company's net income, but there would be no change in the investee's net income. Therefore, the net income would be unchanged, and only the retained earnings would increase by $25,000 due to the implementation of the equity method.

Gerken Company Concluded at the Beginning of 2016 That the Company's