27.(80 Minutes) (Prepare consolidation worksheet for a father-son-grandson combination. Also asks about income taxes paid on both a separate and a consolidated return)

a. Acquisition-Date Allocation and AmortizationThe January 1, 2012 book values are determined by removing the 2012 income from the January 1, 2013 book values (based on equity accounts).

Consideration transferred for Stookey.......................... $344,000Noncontrolling interest fair value .................................. 86,000Stookey business fair value ........................................... $430,000Stookey book value ........................................................ (380,000)Customer List................................................................... $50,000Life ................................................................................... 10 YearsAnnual amortization ....................................................... $5,000

Consideration transferred for Yarrow............................ $720,000Noncontrolling interest fair value .................................. 80,000Yarrow business fair value ............................................ $800,000Yarrow book value........................................................... 740,000Copyright ......................................................................... $60,000Life ................................................................................... 15 YearsAnnual amortization ....................................................... $4,000

CONSOLIDATION ENTRIES

Entry *GRetained Earnings, 1/1/13 (Stookey) ........................ 7,680

Cost of Goods Sold .............................................. 7,680(To give effect to unrealized gain from 2012. Amount is calculated based on normal 48% markup [found from Income Statement] multiplied by $16,000 retained inventory [20% of $80,000])

Entry *C1Investment in Stookey .............................................. 85,856

Retained Earnings, 1/1/13 (Yarrow) .................... 85,856(To recognize equity income accruing from Yarrow's investment in Stookey during 2012. Because the initial value method is applied and no dividends paid, no income has been recognized in connection with the 2012 ownership of Stookey. Reported income of $120,000 [2012] less unrealized gain of $7,680 deferred above indicates income of $112,320. Based on 80% ownership, an $89,856 accrual is needed, which is reduced by the $4,000 amortization (80% × $5,000) for that year.

Entry *C2Investment in Yarrow ................................................ 217,670

Retained Earnings, 1/1/13 (Travers) ................... 217,670(To recognize equity income accruing from Travers' investment in Yarrow during 2012. Because the initial method is applied and no dividends paid, income has not been recognized in connection with the 2012 ownership of Yarrow. Income of $245,856 is calculated based on reported income of $160,000 [2012] plus the $85,856 accrual recognized in Entry *C1. Ownership of 90% dictates a $221,270 accrual that is then reduced to $217,670 by the $3,600 [90% × $4,000] amortization applicable to 2012.)

Entry S1Common Stock (Stookey) ......................................... 200,000

Retained Earnings, 1/1/13 (Stookey, as adjustedby Entry *G) .......................................................... 292,320

Investment in Stookey (80%) ......................... 393,856Noncontrolling Interest in Stookey (20%) ..... 98,464

(To eliminate stockholders' equity accounts of subsidiary [Stookey] against corresponding balance in investment account and to recognize noncontrolling interest ownership.)

Entry S2Common Stock (Yarrow) ........................................... 300,000

Retained Earnings, 1/1/13 (Yarrow, as adjustedby Entry *C1) ......................................................... 685,856

Investment in Yarrow (90%) ........................... 887,270Noncontrolling Interest in Yarrow (10%) ...... 98,586

(To eliminate stockholders’ equity accounts of subsidiary Yarrow against corresponding balance in investment account and to recognize noncontrolling interest ownership.)

Entry A1Customer List............................................................. 45,000

Investment in Stookey ......................................... 36,000Noncontrolling Interest in Stookey (20%) .......... 9,000

(To recognize January 1, 2013 unamortized portion of acquisition price assigned to Stookey’s customer list.)

Entry A2Copyright .................................................................... 56,000

Investment in Yarrow ........................................... 50,400Noncontrolling interest in Yarrow....................... 5,600

(To recognize January 1, 2013 unamortized portion of acquisition price assigned to copyright.)

Entry EOperating Expenses .................................................. 9,000

Customer List........................................................ 5,000Copyright............................................................... 4,000

(To recognize amortization expense for 2013—$5,000 in connection with Travers' investment and $3,000 in connection with Yarrow's investment.)

Entry TlSales ........................................................................... 100,000

Cost of Goods Sold .............................................. 100,000(To eliminate intercompany inventory transfers made during 2013.)

Entry GCost of Goods Sold ................................................... 9,600

Inventory (current assets) ................................... 9,600(To defer unrealized gain on ending inventory—$20,000 × 48% markup.)

Noncontrolling Interest in Stookey's Net Income2013 Reported net income ............................................. $100,000Customer list amortization ............................................. (5,000)Realization of 2012 deferred income (*G) ..................... 7,680Deferral of 2013 unrealized gain (G) .............................. (9,600)Realized income 2013 ..................................................... $93,080Outside ownership .......................................................... 20%Noncontrolling interest in Stookey's net income ......... $18,616

Noncontrolling Interest in Yarrow's Net Income2013 Reported net income ............................................. $200,000Copyright amortization ................................................... (4,000)Accrual of Stookey's income (80% of $93,080

realized income [computed above]) ......................... 74,464Realized Income—2013 .................................................. $270,464Outside ownership .......................................................... 10%Noncontrolling interest in Yarrow's net income .......... $27,046

.TRAVERS COMPANY AND CONSOLIDATED SUBSIDIARIES

Consolidation WorksheetDecember 31, 2013

Travers Yarrow Stookey Consolidation EntriesNoncontrollingConsolidated Accounts Company Company Company Debit Credit Interest Balances Sales and other revenues (900,000) (600,000) (500,000) (Tl) 100,000 (1,900,000)Cost of goods sold 480,000 320,000 260,000 (G) 9,600 (*G) 7,680 961,920

(TI) 100,000Operating expenses 100,000 80,000 140,000 (E) 9,000 329,000Separate company net income (320,000) (200,000) (100,000)Consolidated net income (609,080)NCI in Yarrow's net income (27,046) 27,046NCI in Stookey's net income (18,616) 18,616 To controlling interest (563,418)Retained earnings, 1/1/13:

Travers Company (700,000) (*C2) 217,670 (917,670)Yarrow Company (600,000) (S2) 685,856 (*C1) 85,856 -0-Stookey Company (300,000) (*G) 7,680 -0-

(S1) 292,320Net Income (above) (320,000) (200,000) (100,000) (563,418)

Dividends paid 128,000 128,000Retained earnings, 12/31/13 (892,000) (800,000) (400,000) (1,353,088)

Current assets 444,000 380,000 280,000 (G) 9,600 1,094,400Investment in Yarrow Company 720,000 (*C2) 217,670 (S2) 887,270 -0-

(A2) 50,400Investment in Stookey Company 344,000 (*C1) 85,856 (S1) 393,856 -0-

(A1) 36,000Land, buildings, & equipment (net) 949,000 836,000 520,000 2,305,000Customer List (A1) 45,000 (E) 5,000 40,000Copyright (A2) 56,000 (E) 4,000 52,000 Total assets 2,113,000 1,560,000 800,000 3,491,400

Liabilities (721,000) (460,000) (200,000) (1,381,000)Common stock (500,000) (300,000) (200,000) (S1) 200,000

(S2) 300,000 (500,000)Retained earnings, 12/31/13 (above) (892,000) (800,000) (400,000) (S1) 98,464 (1,353,088)NCI interest in Stookey, 1/1/13 (A1) 9,000 (107,464)

(S2) 98,586Noncontrolling interest in Yarrow, 1/1/13 (A2) 5,600 (104,186 ) Noncontrolling interests in subsidiaries (257,312) (257,312 ) Total liabilities and equities (2,113,000) (1,560,000) (800,000) 2,008,982 2,008,982 (3,491,400)

b. Travers' reported income .................................................................... $320,000Yarrow's reported income ................................................................... 200,000Dividend income (none collected) ...................................................... -0-Intercompany gains (no transfers) ..................................................... -0-Amortization expense .......................................................................... (9,000)Taxable income .................................................................................... $511,000Tax rate .................................................................................................. 45%Income tax payable .............................................................................. $229,950

c. Stookey's reported income .................................................................. $100,000(Unrealized gains are not deferred on a separate

tax return.)Tax rate .................................................................................................. 45%Income tax payable .............................................................................. $45,000

d. (1) Because 80% of Stookey's stock is owned by Yarrow, intercompany dividends would be nontaxable. Consequently, no temporary difference is created by Stookey's failure to pay a dividend.

(2) Stookey's unrealized gains are recognized in one time period for financial reporting purposes and in a different time period for tax purposes. A temporary difference is created. The net effect is an increase in taxable income by $1,920 over reported income:

2013 Unrealized gain taxed in 2013..................................................... $9,6002012 Unrealized gain taxed previously in 2012.................................. (7,680)Increase in taxable income .................................................................. $1,920Tax rate .................................................................................................. 45%Deterred income tax asset ................................................................... $864

Income Tax Expense:Travers and Yarrow—payable (part b) .......................................... $229,950Stookey—payable (part c) .............................................................. 45,000Total taxes to be paid—2013........................................................... $274,950Prepayment (Asset) (above) ........................................................... (864)Income tax expense 2013................................................................ $274,086

Because a single rate is used, income tax expense can also be computed by taking consolidated net income (prior to noncontrolling interest reduction) of $609,080 (part a.) and multiplying by the 45% tax rate to obtain $274,086.

Income Tax Expense—Current ...................................... 274,086Deferred Income Tax—Asset ......................................... 864

Income Tax Payable .................................................. 274,950