Q1) 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 recognizable assets in following amounts: Inventory ($300,000) and Plant and Equipment ($700,000). Purchase differential for Inventory is to be amortized over five months and Plant and Equipment over ten years. For remainder of 2005 Downey reports $635,000 of income and pays $100,000 in dividends. Following balances exist for Crane at December 31, 2005, and Downey
At March 31 and December 31, 2005.
| |
Crain
|
Downey
|
|
12/31/2005
|
3/31/2005
|
12/31/2005
|
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
|
Record journal entries essential on Crain's books for 2005 suppose that Crain uses equity method to account for its investment in Downey.