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 Downeyreports $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
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
Total Credits                        $27,236,875               $5,800,000              $9,550,000

Extraordinary Gain From Acquisition of Downey 105,000
Investment Income 211,875

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.