Question

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 2012 with regard to the Gates investment isA. $80,000. B. $30,000. C. $50,000. D. $15,000. E. $75,000.

Answer 1

A. $80,000

Step-by-step explanation:

The computation of the gates investment is shown below:

= Net income × total percentage

where,

Net income = $200,000

And, the total percentage = Acquiring percentage + additional percentage

= 15% + 25%

= 40%

Now put these values to the above formula

So, the value would equal to

= $200,000 × 40%

= $80,000

The dividend part should not impact the investment. So, we do not consider it