Problem

On January 1, 2012, Travers Company acquired 90 percent of Yarrow Company’s outstanding st...

On January 1, 2012, Travers Company acquired 90 percent of Yarrow Company’s outstanding stock for $720,000. The 10 percent noncontrolling interest had an assessed fair value of $80,000 on that date. Any acquisition-date excess fair value over book value was attributed to an unrecorded customer list developed by Yarrow with a remaining life of 15 years.

On the same date, Yarrow acquired an 80 percent interest in Stookey Company for $344,000. At the acquisition date, the 20 percent noncontrolling interest fair value was $86,000. Any excess fair value was attributed to a fully amortized copyright that had a remaining life of 10 years. Although both investments are accounted for using the initial value method, neither Yarrow nor Stookey have distributed dividends since the acquisition date. Travers has a policy to pay cash dividends each year equal to 40 percent of operating earnings. Reported income totals for 2012 follow:

Travers Company

$300,000

Yarrow Company

160,000

Stookey Company

120,000

Following are the 2013 financial statements for these three companies. Stookey has transferred numerous amounts of inventory to Yarrow since the takeover amounting to $80,000 (2012) and $100,000 (2013). These transactions include the same markup applicable to Stookey’s outside sales. In each year, Yarrow carried 20 percent of this inventory into the succeeding year before disposing of it. An effective tax rate of 45 percent is applicable to all companies.

 

Travers Company

Yarrow Company

Stookey Company

Sales

$ (900,000)

$ (600,000)

$(500,000)

Cost of goods sold

480,000

320,000

260,000

Operating expenses

100,000

80,000

140,000

Net income

$ (320,000)

$ (200,000)

$(100,000)

Retained earnings, 1/1/13

$ (700,000)

$ (600,000)

$(300,000)

Net income (above)

(320,000)

(200,000)

(100,000)

Dividends paid

128,000

-0-

-0-

Retained earnings, 12/31/13

$ (892,000)

$ (800,000)

$(400,000)

Current assets

$ 444,000

$ 380,000

$ 280,000

Investment in Yarrow Company.

720,000

-0-

-0-

Investment in Stookey Company.

 

-0-

344,000

-0-

Land, buildings, and equipment (net)

 

949,000

836,000

520,000

Total assets

 

$2,113,000

$ 1,560,000

$ 800,000

Liabilities

 

$ (721,000)

$ (460,000)

$(200,000)

Common stock.

(500,000)

(300,000)

(200,000)

Retained earnings, 12/31/13

(892,000)

(800,000)

(400,000)

Total liabilities and equities

$(2,113,000)

$(1,560,000)

$(800,000)

a. Prepare the business combination’s 2013 consolidation worksheet; ignore income tax effects.

b. Determine the amount of income tax for Travers and Yarrow on a consolidated tax return for 2013.

c. Determine the amount of Stookey’s income tax on a separate tax return for 2013.

d. Based on the answers to requirements (b) and (c), what journal entry does this combination make to record 2013 income tax?

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