$14.00 Crane Mechanics acquired 75 percent of Downey Enterprises

EXERCISE 3-14 Crane Mechanics acquired 75 percent of Downey Enterprises on March 31, 2005, for $3,645,000. Downey’s book value at that date totaled $4,000,000. Appraisal values were greater than book values for identifiable assets in the following amounts: Inventory ($300,000) and Plant and Equipment ($700,000). The purchase differential for Inventory is to be amortized over five months and Plant and Equipment over ten years. For the remainder of 2005 Downey reports $635,000 of income and pays $100,000 in dividends. The following balances exist for Crane at December 31, 2005, and Downey at March 31 and December 31, 2005. Crain Downey 12/31 3/31 12/31 Cash $730,000 $175,000 $180,000 Inventory 1,950,000 260,000 340,000 Plant and Equipment 17,650,000 5,150,000 5,765,000 Accumulated Depreciation (4,655,000) (935,000) (1,250,000) Investment in Downey 3,886,875 Expenses 6,400,000 1,000,000 4,265,000 Dividends 1,275,000 150,000 250,000 Total Debits $27,236,875 $5,800,000 $9,550,000 Liabilities $3,550,000 $650,000 $500,000 Common Stock 350,000 100,000 100,000 Additional Paid-In Capital 2,650,000 850,000 850,000 Retained Earnings 9,720,000 2,800,000 2,800,000 Sales 10,650,000 1,400,000 5,300,000 Extraordinary Gain From Acquisition of Downey 105,000 Investment Income 211,875 Total Credits $27,236,875 $5,800,000 $9,550,000 Required: A. Record the journal entries necessary on Crain’s books for 2005 assuming that Crain uses the equity method to account for its investment in Downey. B. Prepare all worksheet eliminations in journal entry form necessary to consolidate Crain and Downey at December 31, 2005. C. Prepare the consolidation worksheet for Crain and Downey at December 31, 2005.

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