Question

Gerken Company concluded at the beginning of 2018 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:-Net income and retained earnings will be higher by $25k-Net income will be unchanged, and retained earnings will be higher by $25k-Net income and retained earnings will be higher by $75k-The accounts will be unchanged because no adjustment is necessary

Answer 1

After the implementation of the equity process, the savings portfolio must be calculated for the correct value of assets for retained earnings.

Thus Retained Earnings will increase by $25000 after the adjustment.

So the correct option is Net income will be unchanged and Retained Earnings will increase by $25000.

Any increases or decreases in net income and dividend payments to owners may affect the retained earnings. As a result, factors that increase or lower net income will eventually affect retained profit.