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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.

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  • Category:- Accounting Basics
  • Reference No.:- M920727

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