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.

Travers Company	Yarrow Company	Stookey Company
Sales	($900,000)	($600,000)	($500,000)
Cost of goods sold	480,000	320,000	260,000
Operating expenses	100,000	80,000	140,000
Net income	($320,000)	($200,000)	($100,000)
Retained earnings, 1/1/11	($700,000)	($600,000)	($300,000)
Net income (above)	320,000	200,000	100,000
Dividends paid	128,000	–0–	–0–
Retained earnings, 12/31/11	($892,000)	($800,000)	($400,000)
Current assets	$444,000	$380,000	$280,000
Investment in Yarrow Company	720,000	–0–	–0–
Investment in Stookey Company	–0–	344,000	–0–
Land, buildings, and equipment (net)	949,000	836,000	520,000
Total assets	$2,113,000	$1,560,000	$800,000
Liabilities	($721,000)	($460,000)	($200,000)
Common stock	500,000	300,000	200,000
Retained earnings, 12/31/11	892,000	800,000	400,000
Total liabilities and equities	($2,113,000)	($1,560,000)	($800,000)

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 income tax?