EXERCISE 3-14 Crane Mechanics acquired 75 percent of Downey Enterprises on March 31, 2005, for $3,645,000. Downeys 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 Crains books for 2005 assuming that Crain uses the equity method to account for its investment in Downey