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

Question

Quizplus · Accepted Answer

Under the fair-value method, Dodge would recognize income based on the dividends received from Gates. Dodge owns 15% of Gates, so for 2011, the income recognized would be 15% of the dividends paid by Gates, which is 15% of $50,000, resulting in $7,500.

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