Crane Mechanics acquired 75 percent of Downey Enterprises

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 valuesfor 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 andEquipment 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 Downeyat March 31 and December 31, 2005.Crain Downey12/31 3/31 12/31Cash $730,000 $175,000 $180,000Inventory 1,950,000 260,000 340,000Plant and Equipment 17,650,000 5,150,000 5,765,000Accumulated Depreciation (4,655,000) (935,000) (1,250,000)Investment in Downey 3,886,875Expenses 6,400,000 1,000,000 4,265,000Dividends 1,275,000 150,000 250,000Total Debits $27,236,875 $5,800,000 $9,550,000Liabilities $3,550,000 $650,000 $500,000Common Stock 350,000 100,000 100,000Additional Paid-In Capital 2,650,000 850,000 850,000Retained Earnings 9,720,000 2,800,000 2,800,000Sales 10,650,000 1,400,000 5,300,000Extraordinary Gain FromAcquisition of Downey 105,000Investment Income 211,875Total Credits $27,236,875 $5,800,000 $9,550,000Required:A. Record the journal entries necessary on Crain’s books for 2005 assuming that Crain uses theequity method to account for its investment in Downey.B. Prepare all worksheet eliminations in journal entry form necessary to consolidate Crain andDowney at December 31, 2005.C. Prepare the consolidation worksheet for Crain and Downey at December 31, 2005.

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