Solved: On January 1 2012 Travers Company acquired 90

percent of

On January 1, 2012, Travers Company acquired 90 percent of Yarrow Company's outstanding

stock for $720,000. The 10 percent non-controlling 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 non-controlling 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.

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?

On January 1 2012 Travers Company acquired 90 percent of

ANSWER
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