Question

On January 1, 2017, Travers Company acquired 90 percent of Yarrow Company's outstanding stock for $918,000. The 10 percent noncontrolling interest had an assessed fair value of $102,000 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 $520,000. At the acquisition date, the 20 percent noncontrolling interest fair value was $130,000. 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 declare and pay cash dividends each year equal to 40 percent of its separate company operating earnings. Reported income totals for 2017 follow:

Travers Company	$	520,000
Yarrow Company		270,000
Stookey Company		208,000

Following are the 2018 financial statements for these three companies. Stookey has transferred numerous amounts of inventory to Yarrow since the takeover amounting to $124,000 (2017) and $155,000 (2018). 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 40 percent is applicable to all companies. All dividend declarations are paid in the same period.

	Travers Company				Yarrow Company				Stookey Company
Sales	$	(1,120,000	)		$	(769,400	)		$	(544,000	)
Cost of goods sold		596,600				410,200				326,400
Operating expenses		124,200				102,000				108,800
Net income	$	(399,200	)		$	(257,200	)		$	(108,800	)
Retained earnings, 1/1/18	$	(920,000	)		$	(771,600	)		$	(498,000	)
Net income (above)		(399,200	)			(257,200	)			(108,800	)
Dividends declared		159,680				0				0
Retained earnings, 12/31/18	$	(1,159,520	)		$	(1,028,800	)		$	(606,800	)
Current assets	$	578,200			$	487,800			$	388,700
Investment in Yarrow Company		918,000				0				0
Investment in Stookey Company		0				520,000				0
Land, buildings, and equipment (net)		1,210,800				880,000				506,800
Total assets	$	2,707,000			$	1,887,800			$	895,500
Liabilities	$	(1,047,480	)		$	(532,600	)		$	(88,700	)
Common stock		(500,000	)			(326,400	)			(200,000	)
Retained earnings, 12/31/18		(1,159,520	)			(1,028,800	)			(606,800	)
Total liabilities and equities	$	(2,707,000	)		$	(1,887,800	)		$	(895,500	)

Note: Parentheses indicate a credit balance.

Prepare the business combination's 2018 consolidation worksheet; ignore income tax effects.

Determine the amount of income tax for Travers and Yarrow on a consolidated tax return for 2018.

Determine the amount of Stookey's income tax on a separate tax return for 2018.

Based on the answers to requirements (b) and (c), what journal entry does this combination make to record 2018 income tax?

Answer 1

A)

consolidate work sheet:

PARTICULARS	AMOUNT ($)	LIABALITIES	AMOUNT($)
ASSETS		LIABILITIES	1668780$
CURRENT ASSETS	1454700$	COMMON STOCK	1026400$
INVESTMENT IN YARROW	918000$	RETAIND EARNINGS	2795120$
INVESTMENT IN STOOKEY	520000$	--------
FIXED ASSETS (NET)	2597600$	---------
TOTAL ASSETS	5490300$	TOTAL LAIBILITIES	5490300$
NET INCOME STATEMENT:
SALES	2433400$
COST OF GOODS SOLD	1333200$
OPERATING EXPENSES	335000$
NET INCOME (EXC TAX)	765200$

B)

The Total Net income for Travers and Yarrow amounts:

= 399,200 + 257,200

= 656400$

the tax rate for all three companies is 40%,so that consolidate tax rate will also be 40%

therfore,the income tax paid by travers and yarrow = 40% of 656400

= 262560$

c)

Stookey's Income for the year 2018,amounts to 108,800$

the tax he has to pay = 40% * 108800$

= 43520$

D)

The following will be the journal entry for income tax:

Travers& Yarrow Income Tax A/c ...................... Debit = 262560$

Stookey's Income Tax A/c ............................... Debit = 43520$

To cash A/c------------------------------Credit = 306080 $

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