On January 1, 2020, 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 has distributed dividends since the acquisition date. Travers has a policy to declare and pay cash dividends each year equal to 40 percent of its separate company operating earnings. Reported income totals for 2020 follow:

Travers Company ...................... $ 300,000

Yarrow Company ......................     160,000

Stookey Company ......................   120,000

The following are the 2021 financial statements for these three companies (credit balances indicated by parentheses). Stookey has transferred numerous amounts of inventory to Yarrow since the takeover amounting to $80,000 (2020) and $100,000 (2021). 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 21 percent is applicable to all companies. All dividend declarations are paid in the same period.

a. Prepare the business combination’s 2021 consolidation worksheet; ignore income tax effects.

b. Determine the amount of income tax for Travers and Yarrow on a consolidated tax return for 2021.

c. Determine the amount of Stookey’s income tax on a separate tax return for 2021.

d. Based on the answers to requirements (b) and (c), what journal entry does this combination make to record 2021 income tax?

Transcribed Image Text:

Travers Yarrow Stookey Company Company Company $ (900,000) 480,000 $ (600,000) 320,000 $ (500,000) 260,000 140,000 $ (100,000) $ (300,000) (100,000) Sales ..... Cost of goods sold. Operating expenses. 100,000 80,000 Net income... $ (320,000) $ (700,000) (320,000) $ (200,000) Retained earnings, 1/1/21. Net income (above) Dividends declared.. $ (600,000) (200,000) 128,000 $ (892,000) -0- -0- $ (400,000) $ 280,000 -0- Retained earnings, 12/31/21 $ (800,000) Current assets.. Investment in Yarrow Company. Investment in Stookey Company. Land, buildings, and equipment (net) $ 444,000 2$ 380,000 720,000 -0- -0- -0- 344,000 836,000 520,000 $ 800,000 949,000 Total assets . $ 2,113,000 $ (721,000) (500,000) (892,000) $ 1,560,000 $ (460,000) (300,000) $ (200,000) (200,000) (400,000) $ (800,000) Liabilities... Common stock Retained earnings, 12/31/21 (800,000) $ (1,560,000) Total liabilities and equities.. $ (2,113,000)