Answered

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Gerken Company concluded at the beginning of 2021 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 $62,000 at the time of the change, and accountants working with company records determined that the balance would have been $99,000 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:________

a. Net income and retained earnings will be higher by $85,000.
b. The accounts will be unchanged, because no adjustment is necessary.
c. Net income and retained earnings will be higher by $15,000.
d. Net income will be unchanged, and retained earnings will be higher by $15,000.

Sagot :

Parrain

Answer: Net income will be unchanged, and retained earnings will be higher by $37,000.

Explanation:

If using the equity method, the value of the investment in DillCo would be adjusted for DillCo net income and dividends.

Gerken Net income will not be affected but retained earnings will be because it is equity and needs to be adjusted for the investee net income.

The adjustment will be:

= 99,000 - 62,000

= $37,000

The Retained earnings will be higher by $37,000.

These options are not for this variant of the question.

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