Dodge, Incorporated acquires 15% of Gates Corporation on January 1, 2017, for $105,000 when the book value of Gates was $600,000. During 2017 Gates reported net income of $150,000 and paid dividends of $50,000. On January 1, 2018, 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 2017 but Dodge has deemed it necessary to change to the equity method after the second purchase. During 2018 Gates reported net income of $200,000, and reported dividends of $75,000.Which of the following is true regarding the change from the fair-value method to the equity method?
A. Dodge must record a debit to additional paid-in capital for $15,000.
B. Dodge must retrospectively apply the equity method to interests reported under the fair-value method.
C. Dodge must record a credit of $15,000 to the Gates Investment Account.
D. Dodge must record a debit of $200,000 to the Gates Investment Account.
E. Dodge must record a debit to additional paid-in capital in the amount of $200,000.
Answer: D
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