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

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

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.