Dodge , Incorporated of Gates was $600,000. January 1, 2012, Dodge purchased a a

Question

Dodge , Incorporated of Gates was $600,000. January 1, 2012, Dodge purchased a 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 acquires 15% of Gates Corporation on January 1, 2011, for $105,000 when the book value During 2011 Gates reported net income of $150,000 and paid dividends of $50,000. On n additional 25% of Gates for $200,000. Any excess cost over book value is income of $200,000 and reported dividends of $75,000. 6. Which adjustment would be made to change from the fair-value method to the equity method? A. A debit to additional paid-in capital for $15,000. B. A credit to additional paid-in capital for $15,000. C. A debit to retained earnings for $15,000. D. A credit to retained earnings for $15,000. E. A credit to a gain on investment.

Explanation / Answer

As the problem mentions, Dodge Incorporated acquired 15% of Gates Corporation and Gate Corporation reported net income for 2013 is $150000, hence,

15% OF THE NET INCOME ie. 15% of $150000= $ 22, 500

15% of dividend income =50000*15% = 7500

22500-7500 = 15000

Option D is correct, that is A credit to retained earnings for $15,000

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