On January 1, 2010, 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 operational earnings. Reported income totals for 2011 follow:
Travers Company . . . . . . . . . . . . . . . $300,000
Yarrow Company . . . . . . . . . . . . . . . 160,000
Stookey Company . . . . . . . . . . . . . . 120,000

Following are the 2011 financial statements for these three companies. Stookey has transferred numerous amounts of inventory to Yarrow since the takeover amounting to $80,000 (2010) and $100,000 (2011). 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 2011 consolidation worksheet; ignore income tax effects.
b. Determine the amount of income tax for Travers and Yarrow on a consolidated tax return for 2011.
c. Determine the amount of Stookey€™s income tax on a separate tax return for 2011.
d. Based on the answers to requirements (b) and (c), what journal entry does this combination make to record 2011 incometax?

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Stookey Company Company Company (900,000) (600,000) $(500,000) 260,000 80,000 140,000 S (320,000) (200,000) (100,000) Travers Yarrow Sales Cost of goods sold . Operating expenses 480,000 100,000 320,000 Net income Retained earnings, 1/1/11- Net income (above) $ (700,000) (600,000 $(300,000) (320,000) (200,000) (100,000) 128,000 -0 Retained earnings, 12/B1/11 Current assets Investment in Yarrow Company Investment in Stookey Company Land, buildings, and equipment (net) $ (892,000) (800,000) $(400,000) $444,000 380,000 280,000 720,000 344,000 836,000 949,000 520,000 Total assets Liabilities Common stock Retained earnings, 12B1/11.. $2,113,000 1,560,000 800,000 $(721,000) $(460,000) $(200,000) (500,000) (300,000) (200,000) (892,000) (800,000) (400,000) $(2,113,000) $1,560,000) $(800,000) Total liabilities and equities