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.
|
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 the journal entries necessary on Crain’s books for 2005 assuming that Crain uses the equity method to account for its investment in Downey.
