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 | |

| | | | | | | | | | | | | | | | |31-Dec | | |31-Mar | |31-Dec | | | | | | | | | | | | | |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.