I doubt you have 1/4" end play, even if you do, it is not a problem as long as the crankshaft seals hold. You can correct excess end play by, going to a thinner sump gasket, this will only get you a few thousandths, adding thrust spacers between the crankshaft and bottom bearing OR looking for a thicker crankshaft timing gear to swap with yours. YES, there is differences in the thickness of those timing gears.
Also about the knock, many of these older Flathead twins developed a "chuckle" noticeable at idle in particular, usually caused by excess play in the top main bearing. This play is the results of idling the engine too slowly over the years. The oil slinger does not throw sufficient oil up to the top main when idled too slowly. Here again, IF that is the source, no problem as long as the crankshaft seal holds. speed up idle.
Thanks for the offer D-Dogg,if I do get up that way I will give you a call.
M# 422727 Type 121401 Code 9501205B MTD 18/42 TMO 3500006 #1A245H30011.
I re-measured once I pulled the engine out and it's more like an 8th'' and once I get a flywheel puller (couldn't get it off) I will check the seals at that time. There was some oil under neath but it's hard to tell since I cleaned the engine before I started to pull it.
About the play in the top main bearing I will have to look at that,if thats the case then I will check the bearing once I get in there.
Thanks for your replies