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McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2009
Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 7-1
CHAPTER 7
CONSOLIDATED FINANCIAL STATEMENTS - OWNERSHIP
PATTERNS AND INCOME TAXES
Chapter Outline
I. Indirect subsidiary control
A. Control of subsidiary companies within a business combination is often of an indirect
nature; one subsidiary possesses the stock of another rather than the parent having
direct ownership.
1. These ownership patterns may be developed specifically to enhance control or for
organizational purposes.
2. Such ownership patterns may also result from the parent company's acquisition of a
company that already possesses subsidiaries.
B. One of the most common corporate structures is the father-son-grandson configuration
where each subsidiary in turn owns one or more subsidiaries.
C. The consolidation process is altered somewhat when indirect control is present.
1. The worksheet entries are effectively doubled by each corporate ownership layer but
the concepts underlying the consolidation process are not changed.
2. Calculation of the accrual-based income of a subsidiary recognizing the consolidated
relationships is an important step in an indirect ownership structure.
a. The determination of accrual-based income figures is needed for equity income
accruals as well as for the computation of noncontrolling interest balances.
b. Any company within the business combination that is in both a parent and a
subsidiary position must recognize the equity income accruing from its subsidiary
before computing its own income.
II. Indirect subsidiary control-connecting affiliation
A. A connecting affiliation exists whenever two or more companies within a business
combination hold an equity interest in another member of that organization.
B. Despite this variation in the standard ownership pattern, the consolidation process is
essentially the same for a connecting affiliation as for a father-son-grandson
organization.
C. Once again, any company in both a parent and a subsidiary position must recognize an
appropriate equity accrual in computing its own income.
III. Mutual ownership
A. A mutual affiliation exists whenever a subsidiary owns shares of its parent company.
B. Parent shares being held by a subsidiary are accounted for by the treasury stock
approach.
1. The cost paid to acquire the parent's stock is reclassified within the consolidation
process to a treasury stock account and no income is accrued.

7- 2 Solutions Manual
2. The treasury stock approach is popular in practice because of its simplicity and is now
required by SFAS 160.
IV. Income tax accounting for a business combination—consolidated tax returns
A. A consolidated tax return can be prepared for all companies comprising an affiliated
group. Any other companies within the business combination file separate tax returns.
B. A domestic corporation may be included in an affiliated group if the parent company
(either directly or indirectly) owns at least 80 percent of the voting stock of the subsidiary
as well as 80 percent of each class of its nonvoting stock.
C. The filing of a consolidated tax return provides several potential advantages to the
members of an affiliated group.
1. Intercompany profits are not taxed until realized.
2. Intercompany dividends are not taxed (although these distributions are nontaxable for
all members of an affiliated group whether a consolidated return or a separate return is
filed).
3. Losses of one affiliate can be used to reduce the taxable income earned by other
members of the group.
D. Income tax expense—effect on noncontrolling interest valuation
1. If a consolidated tax return is filed, an allocation of the total expense must be made to
each of the component companies to arrive at the realized income figures that serve
as a basis for noncontrolling interest computations.
2. Income tax expense is frequently assigned to each subsidiary based on the amounts
that would have been paid on separate returns.
V. Income tax accounting for a business combination—separate tax returns
A. Members of a business combination that are foreign companies or that do not meet the 80
percent ownership rule (as described above) must file separate income tax returns.
B. Companies in an affiliated group can elect to file separate tax returns. Deferred income
taxes are often recognized when separate returns are filed due to temporary differences
stemming from unrealized gains and losses as well as intercompany dividends.
VI. Temporary tax differences can stem from the creation of a business combination
A. The tax basis of a subsidiary's assets and liabilities may differ from their consolidated
values (which is based on the fair market value on the date the combination is created).
B. If additional taxes will result in future years (for example, it the tax basis of an asset is
lower than its consolidated value so that future depreciation expense for tax purposes will
be less), a deferred tax liability is created by a combination.
C. The deferred tax liability is then written off (creating a reduction in tax expense) in future
years so that the net expense recognized (a lower number) matches the combination's
book income (a lower number due to the extra depreciation of the consolidated value).
Vll. Operating loss carryforwards
A. Net operating losses recognized by a company can be used to reduce taxable income
from the previous two years (a carryback) or for the future 20 years (a carryforward).

Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 7- 3
B. If one company in a newly created combination has a tax carryforward, the future tax
benefits are recognized as a deferred income tax asset.
C. However, a valuation allowance must also be recorded to reduce the deferred tax asset to
the amount that is more likely than not to be realized.
Learning Objectives
Having completed Chapter 7, "Ownership Patterns and Income Taxes—Consolidated Financial
Statements," students should be able to fulfill each of the following learning objectives:
1. Differentiate between a father-son-grandson ownership configuration and a connecting
affiliation.
2. Calculate realized income figures for all companies in a business combination when either a
father-son-grandson or connecting affiliation is in existence.
3. Prepare a consolidation worksheet for both a father-son-grandson ownership pattern and a
connecting affiliation.
4. Eliminate a subsidiary's ownership interest in its parent using the treasury stock approach.
5. Explain the rationale underlying the treasury stock approach to a mutual ownership.
6. List the criteria for being a member of an affiliated group for income tax filing purposes.
7. Discuss the advantages to a business combination of filing a consolidated tax return.
8. Allocate the income tax expense computed on a consolidated tax return to the various
members of a business combination according to their separate taxable incomes.
9. Compute taxable income for an affiliated group based on information presented in a
consolidated set of financial statements.
10. Compute the deferred income tax expense to be recognized when separate tax returns are
filed by any of the members of a business combination.
11. Determine the deferred tax liability that is created when the tax bases of a subsidiary's assets
and liabilities are below consolidated values.
12. Explain the impact that a net operating loss of an acquired affiliate has on consolidated
figures.

Answers to Questions
1. A father-son-grandson relationship is a specific type of ownership configuration often
encountered in business combinations. The parent possesses the stock of one or more
companies. At least one of these subsidiaries holds a majority of the voting stock of its own
subsidiary. Each subsidiary controls other subsidiaries with the chain of ownership going on
indefinitely. The parent actually holds control over all of the companies within the business
combination despite having direct ownership in only its own subsidiaries.
2. In a business combination having an indirect ownership pattern, at least one company is in
both a parent and a subsidiary position. To calculate the accrual-based income earned by that
company, a proper recognition of the equity income accruing from its own subsidiary must
initially be made. Structuring the income calculation in this manner is necessary to ensure that
all earnings are properly included by each company.
3. Able—100% of income accrues to the consolidated entity (as parent company).
Baker—70% (percentage of stock owned by Able).
Carter—56% (80% of stock owned by Baker multiplied by the 70% of Baker controlled by
Able).
Dexter—33.6% (60% of stock owned by Carter multiplied by the 80% of Carter controlled by
Baker multiplied by the 70% of Baker owned by Able).
4. When an indirect ownership is present, the quantity of consolidation entries will increase,
perhaps significantly. An additional set of entries is included on the worksheet for each
separate investment. Furthermore, the determination of realized income figures for each
subsidiary must be computed in a precise manner. For any company in both a parent and a
subsidiary position, equity income accruals are recognized prior to the calculation of that
company's realized income. This realized income total is significant because it serves as the
basis for noncontrolling interest calculations as well as the equity accruals to be recognized by
that company's parent.
5. In a connecting affiliation, two (or more) companies within a business combination own shares
in a third member. A mutual ownership, in contrast, exists whenever a subsidiary possesses
an equity interest in its own parent.
6. In accounting for a mutual ownership, SFAS 160 requires the treasury stock approach. The
treasury stock approach presumes that the cost of the parent shares should be reclassified as
treasury stock within the consolidation process. The subsidiary is being viewed, under this
method, as an agent of the parent. Thus, the shares are accounted for as if the parent had
actually made the acquisition.
7. According to present tax laws, an affiliated group can be comprised of all domestic
corporations in which a parent holds 80 percent ownership. More specifically, the parent must
own (directly or indirectly) 80 percent of the voting stock of the corporation as well as at least
80 percent of each class of nonvoting stock.
8. Several basic advantages are available to combinations that file a consolidated tax return.
First, intercompany profits are not taxed until realized. For companies with large amounts of

intercompany transactions, the deferral of unrealized gains causes a delay in the making of
significant tax payments. Second, losses incurred by one company can be used to reduce or
offset taxable income earned by other members of the affiliated group. In addition,
intercompany dividends are not taxable but that exclusion applies to the members of an
affiliated group regardless of whether a consolidated or separate tax return is filed.
Members of a business combination may be forced to file separate tax returns. Foreign
corporations, for example, must always file separately. Domestic companies that do not meet
the 80 percent ownership rule are also required to file in this manner. Furthermore, companies
that are in an affiliated group may still elect to file separately. If all companies within the
combination are profitable and few intercompany transactions are carried out, little advantage
may accrue from preparing a consolidated return. With a separate filing, a subsidiary has
more flexibility as to accounting methods as well as its choice of a fiscal year-end.
9. The allocation of income tax expense among the component companies of a business
combination has a direct bearing on realized income totals and, therefore, noncontrolling
interest calculations. Obviously, the more expense that is assigned to a particular company
the less realized income is attributed to that concern. Income tax expense can be allocated
based on the income totals that would have been reported by various companies if separate
tax returns had been filed or on the portion of taxable income derived from each company.
10. In filing a separate tax return (assuming that the two companies do not qualify as members of
an affiliated group), the parent must include as income the dividends received from the
subsidiary. For financial reporting purposes, however, income is accrued based on the
ownership percentage of the realized income of the subsidiary. Because income is frequently
recognized by the parent prior to being received in the form of dividends (when it is subject to
taxation), deferred income taxes must be recognized.
Either the parent or the subsidiary might also have to record deferred income taxes in
connection with any unrealized intercompany gain. On a separate tax return, such gains are
reported at the time of transfer while for financial reporting purposes they are appropriately
deferred until realized. Once again, a temporary difference is created which necessitates the
recognition of deferred income taxes.
11. If the consolidated value of a subsidiary’s assets exceeds their tax basis, depreciation
expense in the future will be less on the tax return than is shown for external reporting
purposes. The reduced expense creates higher taxable income and, thus, increases taxes.
Therefore, the difference in values dictates an anticipated increase in future tax payments.
This deferred liability is recognized at the time the combination is created. Subsequently, when
actual tax payments do arise, the deferred liability is written off rather than recognizing
expense based solely on the current liability. In this manner, the expense is shown at a lower
figure, one that is matched with reported income (which is also a lower balance because of
the extra depreciation).
Recognition of this deferred liability at date of acquisition also reduces the net amount
attributed to the subsidiary's assets and liabilities in the initial allocation process. Therefore,
the residual asset (goodwill) is increased by the amount of any liability that must be
recognized.

12. A net operating loss carryforward allows the company to reduce taxable income for up to 20
years into the future. Thus, a benefit may possibly be derived from the carryforward but that
benefit is based on Wilson (the subsidiary) being able to generate taxable income to be
decreased by the carryforward. To reflect the potential tax reduction, a deferred income tax
asset is recorded for the total amount of anticipated benefit. However, because of the
uncertainty, unless the receipt of this benefit is more likely than not to be received, a valuation
allowance must also be recorded as a contra account to the asset. The valuation allowance
may be for the entire amount or just for a portion of the asset.
13. At the date of acquisition, the valuation allowance was $150,000. As a contra asset account,
recognition of this amount reduced the net assets attributed to the subsidiary and, hence,
increased the recording of goodwill (assuming that the price did not indicate a bargain
purchase). If the valuation allowance is subsequently reduced to $110,000, the net assets
have increased by $40,000. This change is reflected by a decrease in income tax expense.

Answers to Problems
1. D
2. B
3. D
4. C
5. C
6. C
7. A Damson's accrual-based income:
Operational income ................................................................. $200,000
Defer unrealized gain ............................................................... (40,000)
Damson's accrual-based income ....................................... $160,000
Crimson's accrual-based income:
Investment Income (90% of Damson’s realized income) ....... 144,000
Crimson's accrual-based income ...................................... $344,000
Bassett's accrual-based income:
Investment income (80% of Crimson's realized income) ...... 275,200
Bassett's accrual-based income ........................................ $575,200
8. C Icede's accrual-based income:
Icede's accrual-based income ........................................... $160,000
Outside ownership .................................................................. 20%
Noncontrolling interest ...................................................... $32,000
Healthstone's accrual-based income:
Investment income (80% of Icede's accrual-based income) . 128,000
Healthstone's accrual-based income ................................ $398,000
Outside ownership .................................................................. 20%
Noncontrolling interest ...................................................... $79,600
Total noncontrolling interest = $111,600 ($32,000 + $79,600)

9. D Juvyn's Operational Income ......................................................... $50,000
Dividend Income ........................................................................... 14,000
Juvyn's Income .............................................................................. $64,000
Outside Ownership ....................................................................... 10%
Noncontrolling Interest ................................................................. $6,400
10. A Equity Income (60% of $200,000) ................................................. $120,000
Dividend Income (60% of $40,000) ............................................... 24,000
Tax Difference .......................................................................... $96,000
Dividend Deduction upon Eventual Distribution (80%) .............. (76,800)
Temporary Portion of Tax Difference ..................................... $19,200
Tax Rate ......................................................................................... 30%
Deferred Income Tax Liability ................................................. $5,760
11.C Unrealized Gain:
Total Gain ................................................................................... $30,000
Portion Still Held ....................................................................... 20%
Unrealized Gain ........................................................................ $6,000
Tax Rate ......................................................................................... 25%
Deferred Tax Asset .................................................................... $1,500
12.A Recognition of this gain is not required on a consolidated tax return.
13.C Because fair value of the subsidiary's assets exceeds the tax basis by
$100,000 a deferred tax liability of $30,000 (30%) must be recorded. Goodwill
is then computed as follows:
Consideration transferred ...................................... $420,000
Fair Value ............................................................... $400,000
Deferred Tax Liability ............................................... (30,000) 370,000
Goodwill .................................................................... $50,000
14.(35 Minutes) (Series of reporting and consolidation questions pertaining to a
father-son-grandson combination. Includes unrealized inventory gains)
a. Consideration transferred (by Tree) ............................. $252,000
Noncontrolling interest fair value ................................. 108,000
Limb’s business fair value............................................. 360,000
Book value ............................................................... (300,000)
Trade name ..................................................................... $60,000
Life ................................................................................. 30 years
Annual amortization ...................................................... $2,000

14. (continued)
Consideration transferred for Leaf (by Limb) .............. $91,000
Leaf’s business fair value ............................................. $130,000
Book value ............................................................... (100,000)
Trade name ..................................................................... $30,000
Life ................................................................................. 30 years
Annual amortization ...................................................... $1,000
a. Investment in Limb $252,000
Limb's reported income-2009 $40,000
Amortization expense (2,000)
Accrual-based income $38,000
Limb’s percentage ownership 70%
Equity accrual-2009 $26,600
Dividends received 2009 (7,000)
Limb's reported income-2010 $60,000
Amortization expense (2,000)
Income from Leaf 6,300
Limb’s percentage ownership 70%
Equity accrual-2010 $45,010
Dividends received 2010 (14,000)
Investment in Limb 12-31-10 $302,610
b. Leaf—2010 income (revenues minus expenses) $10,000
Amortization (1,000)
Limb's ownership percentage 70%
Equity Income accrual $6,300
Income recognized ($2,000 dividends × 70%) (1,400)
Retained earnings increase (Limb), 1/1/11 $4,900
Limb—2009 operating income $40,000
Limb—2010 operating income 60,000
Amortization (2 years at $2,000 per year) (4,000)
Equity income from ownership of Leaf (above) 6,300
Total income for previous periods 102,300
Tree's ownership percentage 70%
Equity Income accrual 71,610
Income recognized ($10,000 [2009] + $20,000 [2010]
dividends × 70% ownership) (21,000)
Retained earnings Increase (Tree), 1/1/11 $50,610

14.(continued)
c. Consolidated sales (total for the companies) $1,260,000
Consolidated expenses (total for the companies) (1,025,000)
Total amortization expense (see a.) (3,000)
Consolidated net income for 2011 $232,000
d. Noncontrolling interest in income of Leaf
Revenues less expenses $30,000
Excess amortization (1,000)
Noncontrolling interest percentage 30%
Noncontrolling interest in income of Leaf $8,700
Noncontrolling interest in income of Limb:
Revenues less expenses $65,000
Excess amortization (2,000)
Equity in Leaf income [(30,000-1,000) × 70%] 20,300
Realized income of Limb—2011 $83,300
Outside ownership 30% $24,990
NCI share of consolidated income $33,690
e. 2010 Realized income of Limb (prior to accounting
for unrealized gains) (see a) $64,300
2009 Transfer-gain recognized in 2010 10,000
2010 Transfer-gain to be recognized in 2011 (16,000)
2010 Realized income Limb $58,300
2011 Realized Income of Limb (prior to accounting
for unrealized gains) (see d.) $83,300
2010 Transfer-gain recognized in 2011 16,000
2011 Transfer-gain to be recognized in 2012 (25,000)
2011 Realized income—Limb $74,300
f. In b., an adjustment of $50,610 was made to the beginning 2011 retained
earnings. Question e. takes this same question and alters it by including
unrealized gains. The $10,000 gain does not affect the answer because the 2010
and 2011 effects cancel each other.
Thus, only the $16,000 gain must be taken into consideration on January 1,
2011. Limb’s realized income in 2010 is reduced by $16,000 because of the
deferred gain. The parent's equity accrual would be reduced by $11,200 or 70%
of that figure. The adjustment as of January 1, 2011 is $39,410 ($50,610 –
$11,200).

15. (15 minutes) (Income and noncontrolling interest with mutual ownership.)
a. Consideration transferred by Uncle ............................. $500,000
Nephew’s business fair value ....................................... $625,000
Book value ..................................................................... 600,000
Intangible Assets ........................................................... $25,000
Life ................................................................................. 10 years
Amortization expense (annual) ..................................... $2,500
Income reported by Nephew—2011 .............................. $50,000
Amortization expense (above) ...................................... (2,500)
Accrual-based income.................................................... 47,500
Uncle's ownership percentage ..................................... 80%
Income of subsidiary recognized by Uncle ................. $38,000
b. To the outside owners, the $6,000 intercompany dividends ($20,000 × 30%) paid
by Uncle are viewed as income because the book value of Nephew is
increasing. Thus, the noncontrolling interest's share of income is $10,700 or
20% of [$47,500 income ($50,000 operational income less $2,500 excess
amortization) plus the $6,000 in dividends].
16. (35 Minutes) (Consolidated income for a father-son-grandson combination.)
a. Mesa's operating income $250,000
Butte's operating income 98,000
Valley's operating income 140,000
Amortization expense–Mesa's investment in Butte (22,500)
Amortization expense–Butte's investment in Valley (8,000)
Consolidated net income $457,500
b. Valley's operating income $140,000
Amortization expense (on Butte's investment) (8,000)
Valley's accrual-based income $132,000
Outside ownership 45%
Noncontrolling interest in Valley's income $59,400
Butte's operating income $ 98,000
Amortization expense (on Mesa's investment) (22,500)
Equity accrual from ownership of Valley
($132,000 × 55%) 72,600
Butte's accrual-based income $148,100
Noncontrolling interest in Butte's income $29,620
Total noncontrolling interest in income of subsidiaries $89,020

16. (Continued)
Mesa’s operating income $250,000
Mesa’s share of Butte’s operating income (80% × $98,000) 78,400
Mesa’s share of Valley’s operating income (80% × 55% × $140,000) 61,600
Mesa’s share of Butte’s excess amortization (80% × $22,500) (18,000)
Mesa’s share of Valley’s excess amortization (80% × 55% × $8,000) (3,520)
Controlling interest in consolidated net income $368,480
Noncontrolling interest in consolidated net income 89,020
Consolidated net income $457,500
17. (30 Minutes) (Consolidated income figures for a connecting affiliation)
UNREALIZED GAINS:
Cleveland ($12,000 remaining inventory × 25% markup) = $3,000
Wisconsin ($40,000 remaining inventory × 30% markup) = $12,000
NONCONTROLLING INTERESTS:
CLEVELAND:
Operational income (sales minus cost of goods sold and
expenses) ................................................................. $60,000
Defer unrealized gain (above) ....................................... (3,000)
Realized income—Cleveland ................................... $57,000
Outside ownership ........................................................ 20%
Noncontrolling interest in Cleveland's income ...... $11,400
WISCONSIN:
Operational income (sales minus cost of goods sold and
expenses) ................................................................. $110,000
Defer unrealized gain (above) ....................................... (12,000)
Investment income (60% of Cleveland's realized income of
$57,000) .................................................................... 34,200
Realized income—Wisconsin .................................. $132,200
Outside ownership ........................................................ 10%
Noncontrolling interest in Wisconsin's income ..... $13,220
TOTAL NONCONTROLLING INTERESTS: $24,620 ($11,400 + $13,220)
CONSOLIDATION TOTALS
 Sales = $1,590,000 (add the three book values and eliminate intercompany
transfers of $40,000 and $100,000)
 Cost of Goods Sold = $1,015,000 (add the three book values, eliminate
intercompany transfers of $40,000 and $100,000, and defer [add] unrealized
gains of $3,000 and $12,000)

17. (continued)
 Expenses = $200,000 (add the three book values)
 Dividend Income = -0- (eliminated for consolidation purposes)
 Consolidated net income = $375,000 (consolidated revenues less
consolidated cost of goods sold and expenses)
 Noncontrolling Interests in subsidiaries' income = $24,620 (computed above)
 Controlling interest in consolidated net income = $350,380 (consolidated net
income less noncontrolling interest share)
18.(15 Minutes) (Consolidated income and equity accounts--mutual ownership.)
a. CONSOLIDATED TOTALS
 Sales = $1,800,000 (add the two book values)
 Cost of goods sold = $1,020,000 (add the two book values)
 Expenses = $352,000 (add the two book values and include the amortization
expense of $12,000)
 Dividend income = -0- (eliminated for consolidation purposes)
 Consolidated net income = $428,000 (consolidated revenues less
consolidated cost of goods sold and expenses)
 Noncontrolling interest in Wonderland's income = $11,400 (10 percent of the
reported balance less $12,000 excess amortization). Dividend income is
included because it increases the book value of the subsidiary and,
therefore, the noncontrolling interest.)
b.
 Common Stock = $880,000 (the parent company balance only)
 Treasury Stock = $111,000 (cost paid by subsidiary for the shares of the
parent company)
19. (25 Minutes) (Tax expense with separate tax returns for a combination.)
a. CONSOLIDATED TOTALS
 Sales = $790,000 (add the two book values and eliminate the $110,000
intercompany transfer)
 Cost of Goods Sold = $340,000 (add the book values, eliminate intercompany
transfers of $110,000, recognize [subtract] $30,000 deferred gain from 2010,
and defer [add] $40,000 intercompany gain deferred into 2011)
 Operating expenses = $234,000 (add the two book values)
 Dividend Income = -0- (eliminated for consolidation purposes)
 Consolidated net income = $216,000 (Revenues less expenses)
 Noncontrolling interest in Down's Income = $18,000 (20 percent of reported
Income of $100,000 plus $30,000 gain deferred from 2010 less $40,000 gain
deferred into 2011)

 Controlling interest in consolidated net income = $198,000
19. (continued)
b. On separate returns, the unrealized gains are reported as taxable income.
Because Up owns 80 percent of Down's stock, the dividends are tax- free and no
deferred tax liability is necessary on the undistributed income.
DUE TO GOVERNMENT: (separate returns)
UP:
Income (without dividend income) ............................... $126,000
Tax rate ......................................................................... 30%
Currently payable to government ............................ $37,800
DOWN:
Reported income ........................................................... $100,000
Tax rate ......................................................................... 30%
Currently payable to government ............................ $30,000
Total Income Tax Payable: Current = $67,800 ($37,800 + $30,000)
CURRENT EXPENSE:
Consolidated net income (part a.) ........................... $198,000
Eliminate noncontrolling interest ........................... +18,000
Income to be taxed ............................................. $216,000
Tax rate .................................................................. 30%
Income tax expense ................................................. $64,800
The $3,000 difference between the liability and the expense is an increase in the
Deferred Income Tax Asset account. It is created by the tax effect (30%) on the
net unrealized gain for the period ($10,000 or $40,000 – $30,000).
20. (45 Minutes) (Series of questions requires computation of income tax expense
and the related payable balance)
a. $260,000 ($650,000 × 40%)
The affiliated group would be taxed on its operating income of $650,000 (the
net unrealized gain is deferred on a consolidated return). The intercompany
income and dividends are not relevant since a consolidated return is filed.
b. $260,000 ($650,000 × 40%)
net unrealized gain is deferred on a consolidated return). The intercompany
income and dividends are not relevant because a consolidated return is filed.

The percentage ownership does not affect the figures on a consolidated
return.

20.(continued)
c. $296,000 ($96,000 + $200,000)
Rogers would pay $96,000 or 40% of its $240,000 operating income. Clarke
would pay $200,000 or 40% of its $500,000 operating income. The unrealized
gain is not deferred when separate returns are filed. Intercompany dividends are
not taxable because the parties qualify as an affiliated group even though
separate returns are being filed. Answer (c.) differs from (a.) and (b.) because
tax on the $90,000 unrealized gain (40% or $36,000) is paid immediately.
d. $268,064
Rogers would record income tax expense of $96,000 or 40% of its $240,000
operating income.
Clarke must record its expense based on the revenue recognized during the
period. Thus, the tax expense is based on operating income of $410,000 (the net
unrealized gain is not being recognized in this period) plus equity income
accruing from Rogers of $100,800 (70% of that company's after-tax income).
Clarke will record an income tax expense of $164,000 in connection with the
operating income ($410,000 × 40%). The expense recognized in connection with
the equity accrual is affected by the dividends-received deduction:
Equity income of subsidiary.......................................... $100,800
Dividends-received deduction (when received) (80%). 80,640
Income subject to taxation ............................................ $20,160
Tax rate ......................................................................... 40%
Income tax expense—equity income (Clarke) ............. $8,064
Income tax expense—operating income (Clarke)
(above) ...................................................................... 164,000 $172,064
Income tax expense—operating income (Rogers)
(above) ...................................................................... 96,000
Income tax expense ....................................................... $268,064
e. $204,480
Clarke will pay $200,000 in connection with its operating income ($500,000 ×
40%) because the unrealized gain cannot be deferred. Clarke also receives
$56,000 in dividends from Rogers ($80,000 × 70%). Tax payment on these
dividends is $4,480 ($56,000 × 20% × 40%). The difference between the payment
by Clarke ($204,480) and the company's expense in (d.) ($172,064) is created by
the premature payment of the tax (a deferred tax asset) on the unrealized gain
($90,000) less the deferred tax liability on the parent's equity accrual ($100,800)
in excess of dividends received ($56,000).

21. (20 Minutes) (Comparison of income tax expense and payable on separate and
consolidated tax returns.)
a. Consolidated Return—2010
Piranto income 2010 (sales less expenses) ...................................... $300,000
Slinton income 2010 (sales less expenses) ...................................... 100,000
2009 gain realized in 2010................................................................... 120,000
2010 deferred gain............................................................................... (150,000)
Taxable income ............................................................................. $370,000
Tax rate .............................................................................................. 40%
Income tax payable—current ........................................................ $148,000
Because no temporary differences exist in this problem, the income tax expense
would also be $148,000. The unrealized gain is not taxed until realized. Dividend
income is not important because a consolidated return is being filed.
b. Separate Returns—2010
On its separate tax return, Piranto will report taxable income of $300,000—the
unrealized gains cannot be deferred. The dividends would not be taxable
because Slinton still meets the criteria to be a member of an affiliated group. A
consolidated return is not a requirement for these dividends to be excluded.
Thus, income taxes payable by Piranto would be $120,000 ($300,000 × 40%).
To determine the income tax expense for Piranto, the two temporary differences
must be taken into account:
Taxable income .............................................................. $300,000
Gain taxed in 2009 although realized
in 2010 ....................................................................... 120,000
Gain taxed in 2010 although not yet realized ............... (150,000)
2010 realized income subject to taxation ..................... $270,000
Tax rate ........................................................................... 40%
The $12,000 difference between the expense and the payable is the tax effect on
the net unrealized gain ($30,000 × 40%).
Slinton will have an expense and payable of $40,000 ($100,000 × 40%).

22.(45 Minutes) (Comparison of income tax expense and payable on separate and
consolidated tax returns. Includes question on mutual ownership and the
conventional approach.)
a. Total income tax expense is $156,877. Because of the level of ownership,
separate returns must be filed. Unrealized gains are taxed immediately as are
intercompany dividends.
Because the unrealized gains are deferred on the consolidated financial
statements, Boxwood's expense would be $34,400 or 40% of $86,000 in realized
income ($100,000 + $18,000 – $32,000).
Lake's income subject to taxation includes its $300,000 in operating income
plus $30,960 in income accruing from its investment in Boxwood (60% of the
after-tax Income of $51,600 [$86,000 – $34,400]). Income tax expense for Lake is
computed as follows:
Operating income .......................................................... $300,000
Equity income ................................................................ $30,960
Taxable portion .............................................................. 20% 6,192
Income eventually subject to taxation ......................... $306,192
Tax rate............................................................................ 40%
Income tax expense Lake (rounded) ............................. $122,477
Income tax expense Boxwood (above) ......................... 34,400
Total income tax expense ............................................. $156,877
b. Boxwood will pay $40,000 ($100,000 × 40%) because separate returns are filed.
Lake, however, will pay its taxes based on dividends received rather than on the
equity accrual. A deferred income tax liability would be established for the
difference. Lake's payment for the current year is computed as follows:
Operating income........................................................... $300,000
Dividend income (60% × $10,000) ................................. $6,000
Taxable portion .............................................................. 20% 1,200
Income currently taxable ............................................... $301,200
Tax rate ......................................................................... 40%
Income tax payable—Lake ............................................ $120,480
Income tax payable—Boxwood (above) ...................... 40,000
Total Income tax payable current ................................. $160,480

22.(continued)
The $3,603 difference between the expense in a. and the payable in b. is created
by the following two effects:
Deferred income tax liability on equity income accrual not yet taxed
($30,960 – $6,000 = $24,960 × 20% × 40%)................................... $1,997
Deferred income tax asset on net unrealized gain
($32,000 – $18,000 = $14,000 × 40%)............................................ 5,600
Net decrease in expense................................................................... $3,603
c. Because a consolidated tax return is filed, unrealized gains are deferred in the
same manner as for external reporting purposes. Dividend income is not
taxable.
Lake's operating income ............................................... $300,000
Boxwood's operating income ....................................... $100,000
Prior year unrealized gain ............................................. 18,000
Current year unrealized gain ........................................ (32,000) 86,000
Income subject to taxation (and currently taxable)...... $386,000
Tax rate ........................................................................... 40%
23. (30 Minutes) (Computation of income tax expense and income tax payable on
consolidated and separate tax returns.)
a. Operating Income .......................................................... $450,000
Tax rate . ......................................................................... 40%
Taxes to be paid ............................................................ $180,000
$50,000 unrealized gain is deferred). Intercompany income and dividends are
not relevant because a consolidated return is filed.
b. Total taxes to be paid are $200,000. Robertson would have to pay $80,000 or
40% of its $200,000 operating income. Garrison would pay $120,000 or 40% of its
$300,000 operating income. The unrealized gain is not deferred because
separate returns are being filed. Intercompany dividends are not taxable
because the parties still qualify as an affiliated group even though separate
returns are being filed.
c. Robertson must report an income tax expense of $80,000 or 40% of its $200,000
operating income.

23. (continued)
Garrison records its expense based on the revenue recognized during the
period. Thus, the expense is computed on an operating income of $250,000 (the
net unrealized gain is not recognized in this period) along with equity income
from Robertson of $84,000 (70% of that company's $120,000 after-tax income).
Garrison will record an income tax expense of $100,000 in connection with the
operating income ($250,000 × 40%) and $6,720 resulting from its equity income
($84,000 × 20% × 40%). Total expense to be reported amounts to $186,720 for
Garrison and Robertson ($80,000 + $100,000 + $6,720).
d. Garrison will pay $120,000 in connection with its operating income ($300,000 ×
40%) and $2,400 because of the dividends received from Robertson. Garrison
will receive $30,000 in dividends based on its 60% ownership. Of this total, only
$6,000 (20%) is taxable. Thus, at a 40% rate, the tax on the dividends would
amount to $2,400 ($6,000 × 40%). The total income taxes payable by Garrison is
$122,400 ($120,000 + $2,400).
24.(10 Minutes) (Impact on goodwill of assets with a different tax vs. book value.)
The assets and liabilities of Kew (the subsidiary) will be consolidated at their
individual fair values (netting to $500,000). However, both the buildings and
equipment have a tax basis that is lower than fair value. Thus, for tax purposes,
future depreciation expense will be lower on the tax return so that taxable
income will exceed book income. The higher taxable income (anticipated in the
future) creates a deferred tax liability at the time the combination is created.
Tax Fair Temporary
Basis Value Difference
Buildings ........................................ $140,000 $180,000 $40,000
Equipment ...................................... 150,000 200,000 50,000
Total temporary difference ...... $90,000
Tax rate ..................................... 30%
Deferred tax liability ................. $27,000
Consequently, Kew's accounts will be consolidated as follows: (parentheses
indicate a credit balance)
Accounts receivable ...................................................... $110,000
Inventory ........................................................................ 130,000
Land .............................................................................. 100,000
Buildings ........................................................................ 180,000
Equipment....................................................................... 200,000

24. (continued)
Liabilities......................................................................... (220,000)
Deferred tax liability ...................................................... (27,000)
Assigned to specific accounts ..................................... 473,000
Purchase price ............................................................... 650,000
Excess assigned to goodwill ........................................ $177,000
25.(55 Minutes) (Consolidation worksheet for a father-son-grandson combination.
Includes intercompany inventory transfers.)
The following computations are needed before the consolidation worksheet is
prepared: calculation of the deferred gains in beginning and ending inventory.
Beginning Unrealized Gain (Wilson)
(January 1, 2011 Inventory Transfer Price (goods remaining) =
Balance) Cost + .25 Cost
$60,000 = 1.25 Cost
$48,000 = Cost
$12,000 is Unrealized Gain
Ending Unrealized Gain (Wilson)
(December 31, 2011 Inventory Transfer Price (goods remaining) =
Balance) Cost + .25 Cost
$90,000 = 1.25 Cost
$72,000 = Cost
$18,000 is Unrealized Gain
CONSOLIDATION ENTRIES
Entry *G
Retained Earnings, 1/1/11 (Wilson) ......................... 12,000
Cost of Goods Sold ............................................ 12,000
(To recognize income on intercompany inventory transfers made in previous
year but not resold until current year as per above computation.)
Entry *C
Retained Earnings, 1/1/11 (House) ............................... 11,200
Investment in Wilson Company ......................... 11,200
(To convert investment account from partial equity method to equity method.
Unrealized gain shown in Entry *G is not properly reflected by parent under
partial equity method [12,000 × 70% = $8,400 income decrease] nor would the
$2,800 in amortization expense for 2009–2010. Thus, a reduction of $11,200 is
required. Because Cuddy is a current year acquisition, no prior conversion to
equity method is required for the investment.)

25.(continued)
Entry S1
Common Stock (Cuddy) ................................................ 150,000
Retained Earnings, 1/1/11 (Cuddy) ............................... 150,000
Investment in Cuddy Company (80%)...................... 240,000
Noncontrolling Interest in Cuddy Common Stock (20%) 60,000
(To eliminate Cuddy's stockholders' equity against the corresponding
investment balance and to recognize noncontrolling interest on common stock.)
Entry S2
Common Stock (Wilson) ............................................... 310,000
Retained Earnings, 1/1/11 (Wilson)
(adjusted by Entry *G) .............................................. 578,000
Investment in Wilson Company (70%) ............... 621,600
Noncontrolling Interest in Wilson (30%) ........... 266,400
(To eliminate Wilson's stockholders' equity against corresponding investment
balance and to recognize noncontrolling interest.)
Entry A
Buildings......................................................................... 54,000
Franchise Contracts ...................................................... 32,000
Goodwill.......................................................................... 140,000
Equipment ................................................................ 10,000
Investment in Wilson Company .............................. 151,200
Noncontrolling interest in Wilson Company........... 64,800
(To allocate excess payment made in connection with purchase of Wilson
shown above. Amortization for 2009 and 2010 has been taken into account in
determining the January 1, 2011 value for each account.)
Entry I1
Income of Cuddy Company ..................................... 56,000
Investment in Cuddy Company .......................... 56,000
(To eliminate intercompany income accrued by both House and Wilson
during the year.)
Entry I2
Income of Wilson Company .................................... 91,000
Investment in Wilson Company ......................... 91,000
(To eliminate intercompany income accrued by House during the year.)
Entry D1
Investment in Cuddy Company ............................... 40,000
Dividends Paid (80%) (Cuddy) ............................ 40,000
(To eliminate effects of intercompany dividend payments.)

25.(continued)
Entry D2
Investment in Wilson Company .............................. 67,200
Dividends Paid (70%) (Wilson) ........................... 67,200
(To eliminate effects of intercompany dividend payments.)
Entry E
Operating Expenses ................................................. 2,000
Equipment ............................................................... 5,000
Franchise Contracts ........................................... 4,000
Buildings .............................................................. 3,000
(To record 2011 amortization on excess payment made in connection with
acquisition of Wilson Company.)
Entry TI
Sales and Other Revenues ...................................... 200,000
Cost of Goods Sold ............................................ 200,000
(To eliminate intercompany inventory sales for the current year.)
Entry G
Cost of Goods Sold .................................................. 18,000
Inventory...............................................................
18,000
(To defer unrealized gain in ending inventory.)
Noncontrolling Interest in Net Income of Cuddy
Reported net income $70,000
Noncontrolling interest in Cuddy income—common $14,000
Noncontrolling Interest in Net Income of Wilson*
Reported operational income $130,000
Equity income of Cuddy ($70,000 × 40%) 28,000
Excess amortization..................................................................... (2,000)
Recognition of 2010 gain (Entry *G) 12,000
Deferral of 2011 unrealized gain (Entry G) (18,000)
Realized income $150,000
Noncontrolling interest in net income of Wilson $45,000

25. (continued)
HOUSE CORPORATION AND CONSOLIDATED SUBSIDIARIES
Consolidation Worksheet
December 31, 2011
Accounts House Wilson Cuddy Consolidation EntriesNoncontrollingConsolidated
Corp. Company Company Debit Credit Interest Balance
Sales and other revenue (900,000) (700,000) (300,000) (TI) 200,000 (1,700,000)
Cost of goods sold 551,000 300,000 140,000 (G) 18,000 (*G) 12,000 797,000
(TI) 200,000
Operating expenses 219,000 270,000 90,000 (E) 2,000 581,000
Income of Wilson Company (91,000) (I2) 91,000 -0-
Income of Cuddy Company (28,000) (28,000) (I1) 56,000 -0-
Net Income (249,000) (158,000) (70,000)
Consolidated net income (322,000)
Noncontrolling interest in
Wilson net income (45,000) 45,000
Noncontrolling interest in
Cuddy net income (14,000) 14,000
To House Corporation (263,000)
Retained earnings, 1/1/11:
—House Corporation (820,000) (*C) 11,200 (808,800)
—Wilson Company (590,000) (*G) 12,000 -0-
(S2)578,000
—Cuddy Company (150,000) (S1)150,000 -0-
Net Income (249,000) (158,000) (70,000) (263,000)
Dividends paid
—House Corporation 100,000 100,000
—Wilson Company 96,000 (D2) 67,200 28,800 -0-
—Cuddy Company 50,000 (D1) 40,000 10,000 -0-
Retained earnings, 12/31/11 (969,000) (652,000) (170,000) (971,800)

25. (continued)
Accounts House Wilson Cuddy Consolidation EntriesNoncontrollingConsolidated
Corp. Company Company Debit Credit Interest Balance
Cash and receivables 220,000 334,000 67,000 621,000
Inventory 390,200 320,000 103,000 (G) 18,000 795,200
Investment in Wilson Company 807,800 (D2) 67,200 (*C) 11,200 -0-
(S2) 621,600
(I2) 91,000
(A) 151,200
Investment in Cuddy Company 128,000 128,000 (D1) 40,000 (S1) 240,000 -0-
(I1) 56,000
Buildings 385,000 320,000 144,000 (A) 54,000 (E) 3,000 900,000
Equipment 310,000 130,000 88,000 (E) 5,000 (A) 10,000 523,000
Land 180,000 300,000 16,000 496,000
Goodwill (A) 140,000 140,000
Franchise Contracts (A) 32,000 (E) 4,000 28,000
Total assets 2,421,000 1,532,000 418,000 3,503,200
Liabilities (632,000) (570,000) (98,000) (1,300,000)
Noncontrolling interest in Cuddy (S1) 60,000 (60,000)
Noncontrolling interest in Wilson (S2) 266,400
Noncontrolling interest in (A) 64,800 (331,200)
subsidiary companies 411,400 (411,400)
Common stock (820,000) (310,000) (150,000) (S1) 150,000 (820,000)
(S2) 310,000
Retained earnings (above) (969,000) (652,000) (170,000) (971,800)
Total liabilities and equities (2,421,000) (1,532,000) (418,000) 1,916,400 1,916,400 (3,503,200)
Parentheses indicate a credit balance.

Advanced Accounting 9th Edition Hoyle Solutions Manual all chapter instant download

26. (20 Minutes) (Consolidation entries for a mutual holding business combination)
a. Acquisition Price Allocation and Amortization Mighty's Purchase of Lowly
Consideration transferred ............................................ $420,000
Lowly’s business fair value ........................................... 700,000
Book value acquired....................................................... (600,000)
Trademarks ..................................................................... $100,000
Annual amortization (20-year life).................................. $5,000
CONSOLIDATION ENTRIES
Entry *C
Investment in Lowly ................................................. 117,000
Retained Earnings, 1/1/10 (Mighty) .................... 117,000
(To record $180,000 income accruing to parent during the previous years as
measured by increase in book value [$200,000 × 60%] and amortization
expense of $3,000 [$5,000 × 60%] for the previous year.)
Entry S1
Common Stock (Lowly) ........................................... 300,000
Retained Earnings, 1/1/10 (Lowly) ........................... 500,000
Investment in Lowly (60%) ................................. 480,000
Noncontrolling Interest in Lowly 1/1/10 (40%) .. 320,000
(To eliminate subsidiary stockholders' equity accounts against investment
account and to recognize noncontrolling interest ownership.)
Entry S2
Treasury Stock ......................................................... 240,000
Investment in Mighty .......................................... 240,000
(To reclassify cost of parent shares as treasury stock.)
Entry A
Trademarks ............................................................... 95,000
Investment in Lowly ............................................ 57,000
Noncontrolling Interest in Lowly 1/1/10 (40%) .. 38,000
(To recognize unamortized portion of acquisition-date excess fair value.)
Entry E
Amortization Expense .............................................. 5,000
Trademarks .......................................................... 5,000
(To record trademarks amortization expense for 2010.)
Noncontrolling interest in subsidiary income = 40% × ($40,000 - $5,000) = $14,000

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“Ahoy, there! Going across in the ferry?” Cap’n Crumbie hailed.
The prospective passenger did not reply, but came straight to the
landing, and, with a puzzled expression, ran his eyes over the Sea-
Lark.
“What have you got there?” he asked. There was something about
either the question or the way in which it was put that rather
irritated the captain of the sloop. However, he did not openly show
his resentment.
“A ferry-boat, across to the town,” he replied. “Are you coming?”
“Queer sort of boat to use for a ferry, isn’t she?” asked the
stranger.
“Why?” asked Jack, who saw nothing whatever queer about his
beloved craft. Obviously the strange boy was one of the “summer
folk,” and city bred at that, probably knowing no more about sailing-
craft than the keeper of a dime museum would.
The boy on the wharf began to laugh, and Jack’s cheeks flushed.
“Are you the chap who wrote to Mr. Farnham in New York about
the Sea-Lark?” the stranger asked.
“That,” replied the skipper with youthful dignity, “is my business.
Push off, George.”
“And who might the young pup be?” asked Cap’n Crumbie, as they
sailed leisurely back to Garnett and Sayer’s wharf. “Never seen him
before, as far as I rec’lect, and yet his face is kind o’ familiar.”
“I don’t know him,” said Jack. “And if he’s trying to be funny at the
expense of this boat, I don’t want to know him. There’s nothing
queer about her, is there, Cap’n?”
“Queer! I should say not! Maybe the color o’ the paint offends his
artistic eye; or then again maybe he’s only jealous.”
“Well, summer visitor or not, if he doesn’t stop trying to make fun
of the sloop I’ll give him a licking,” declared Jack.

“Or let him come on board as a passenger,” grinned the
watchman, “and take his money, and then drop him overboard half-
way over.”
That morning only two other passengers crossed in the ferry, one
of them a lady who had a small hand-bag with her and insisted on
paying Jack fifty cents for his services, and the other a portly man
who wore three diamond rings and, after handing Jack a quarter at
the hotel landing, waiting in the boat, apparently as a guarantee of
good faith, while the boy hunted for change, and finished up by
pocketing the fifteen cents and complaining bitterly about the lad
running a public ferry and not being able to change a quarter.
Business did not improve much during the rest of the day, and the
owner of the ferry was a trifle disappointed.
“They don’t seem to be coming with a rush,” he said to Cap’n
Crumbie.
“For the land’s sake, give ’em a chance!” replied the watchman.
“Here you are, not in business more than an hour or two, and
complaining.”
“I wasn’t complaining,” Jack protested. “I was only wondering
whether it was going to be a success, after all.”
“Can’t you wait about five minutes till somebody besides us gets
wind o’ the ferry?” spluttered the old man. “Give ’em time, son, give
’em time. Why, the season hasn’t half begun yet. Most of the
cottages along the shore are still empty. Another week or two will
make a difference; you see if it don’t.”
Sure enough, business did “look up” a few days later, much to the
satisfaction of both Jack and his father. Mr. Holden, though he had
never discouraged the boy in his project, had always been a little
skeptical as to whether the ferry would bring much grist to the mill,
but he now grew really enthusiastic, for there were times when the
Sea-Lark carried as many as fifteen people at a time. To some extent
Cap’n Crumbie was responsible for the boy’s success in the early
stages of the ferry’s career, as he rarely allowed a party of sight-

seers to wander down to his wharf without urging them to make the
trip in the Sea-Lark.
“Wunnerful sight over there on the Point,” he would say. “You get
a view from there that ain’t equaled in all New England. Ferry-boat
won’t be more’n a few minutes, sir, before it’s back, and it’s a fine
day for a sail.”
“I shall have to give you a commission,” declared Jack, once, after
the watchman had detained almost a boat-load of people until his
return.
“Now, don’t talk foolish,” replied Cap’n Crumbie. “It’s just to keep
me from gettin’ tired o’ myself. Some night maybe I’ll borrow the
sloop and take a party for a moonlight trip round Indian Head.
Meanwhile, I can’t stand here and see you losing good money.”
“That’s a bargain, Cap’n Crumbie,” replied Jack. “Any evening you
want the Sea-Lark you just mention it.”
That afternoon Jack left the hotel landing with several passengers,
including the lady who had given him fifty cents on the first day. She
was going into the town shopping, but Jack noticed that she stood
for a moment on the wharf before embarking, and wore a rather
anxious expression as she looked out toward a canoe that was being
paddled about in the vicinity of Gull Island.
“Don’t you think the wind is a little too strong for any one to be
out there in a canoe?” she asked.
The skipper glanced at the little craft bobbing up and down in the
distance.
“Well, it depends on how well you can handle a canoe,” he replied.
“There’s a fresh breeze, though, and it’s kind of choppy.”
Jack had been thinking of taking a reef in his mainsail, but a few
moments later he was glad he hadn’t. He had run about a cable’s
length from the landing, and the passengers were watching a salt-
bark slowly drifting to anchorage, when his eyes happened to alight
on the canoe. It was perhaps half a mile away, and Jack’s thoughts

were on the navigation of his own boat, but the brief glance showed
him something amiss. With a shout to George to haul in the sheet,
he put the helm hard over and jibed the Sea-Lark, rather than make
the turn in a safer but slower way. There was a stiff wind blowing,
and the boom swept across the deck with a rattle and a bang,
fetching up on the other side with a wrench. But the gear stood the
strain, and the sloop was now racing in the direction of the canoe,
which had capsized.
There was a sudden cry of alarm from the lady. “He’s drowning!
He’s drowning!” Every vestige of color was gone from her face, as,
leaning forward, she stared in horror across the water. “It’s Rodney!
It’s my boy!”
“Lay hold of that boat-hook, George,” sang out the captain. And
then, “We’ll get him in time, ma’am,” he added reassuringly to the
distracted mother.
The Sea-Lark leaned to the breeze and flew on her mission of
rescue. That she would arrive none too soon was evident to all on
board. Apparently the boy in the water was no swimmer, and his
floundering efforts were barely keeping his head above the surface.
A choking appeal for help came across the rapidly narrowing water
that intervened.
“Take the wheel, George!” Jack spoke crisply, imperatively. “Keep
her straight!” As he spoke he slipped off jacket and shoes. “The
moment I jump swing her ’round. You, sir,” he added, to one of the
passengers, “be ready to reach out to me with this boat-hook.”
Another twenty feet! Ten! And then the boy in the water, with a
despairing cry, sank from sight. Jack, poised at the bow, shot over
the side as the Sea-Lark sped past.
Down he went into the green depths. A few yards away a blurred
shape showed dimly and he swam gropingly toward it. Then his
hands found what they sought and in a moment his head was above
water again. Kicking out with all his strength, and sweeping his right
hand through the green water, he clung on to the half-drowned

canoeist with his left, until the sloop, with fluttering sail, loomed
beside him.
A minute later the two dripping figures were on the deck.
The canoeist opened his eyes and looked up at the woman who
was now kneeling beside him. He tried to raise himself on his elbow,
but sank back, gasping for a few moments.
“Hello, Mother! I—I’m all right,” he said presently. “Just a minute,
till I get my breath back. Hope I haven’t scared you, but I—I wasn’t
going to drown.”
Then he sat up, somewhat limply, and looked around. The captain,
with water running from his clothing, was assisting George to
recover the canoe and paddle. As soon as this had been
accomplished, he turned his attention to the boy he had rescued,
and for the first time recognized him.
“Well, how do you feel?” Jack asked, bearing no ill feeling.
“Pretty fair, thanks,” replied the other. “I think I’m still full up to
the neck with water, though. I’m awfully obliged to you. I tried to
catch hold of the paddle, but I couldn’t quite make it. Then I saw
your boat coming, but it seemed ever so far away. I’d have been—”
he was going to say “drowned by now,” but checked himself as his
mother was there—“down there yet if you hadn’t come to the
rescue.”
“That’s all right,” Jack replied. “Glad to have been able to help.”
Then, as the canoeist seemed to have almost recovered, he added:
“Only—only, just as a favor, don’t laugh at this boat again, please!”
A puzzled look came into the other’s face.
“Laugh at her?” he queried.
“Yes,” replied Jack, “and you said she was a queer sort of boat to
use for a ferry.”
“Oh, I remember now,” said the owner of the canoe. “But don’t
you know why it seemed queer to me?” Jack shook his head. “Why,

you see, this was my father’s sloop, for a long time, and all I meant
was that it seemed queer to me to see her being used as a ferry-
boat. I used to sail about in her with my dad three years ago, and
many a time I held that wheel you’re steering with. I used to feel
that she was my boat, though of course, really, she was nothing of
the kind. My name is Rodney Farnham, and this is my mother.”
Jack felt a little sheepish because of the resentment he had
shown, and after Rodney Farnham’s frank explanation he began to
reconsider his opinion of the lad.
“I didn’t understand,” he said. “Sorry if I was rude. I haven’t seen
Mr. Farnham yet, but I want to, to tell him how glad I am he gave
me the boat. I wrote to tell him I’d got her afloat, but he didn’t
reply.”
“Dad’s a pretty busy man when he’s in New York, and I guess he
hasn’t had too much time to write. You may be sure he meant to
look you up when he came down to Greenport, though,” replied Rod.
“We have a motor-boat now, and you must come for a run in her
with me some day; but I’m jolly glad he gave you the old Sea-Lark,
or I might still be floating around back there.”
“It was very fortunate,” Mrs. Farnham agreed. “My husband will be
doubly anxious to see you now. I shall write to him to-night, telling
him what happened. He will probably be with us next week.”
“When he comes I’d like to take you all for a sail. That is, if you
would care to go. You’d be quite safe,” said Jack.
“I’m sure we should, judging from what I’ve seen of your
seamanship to-day,” replied Mrs. Farnham. “And it is very kind of you
to ask us. I’m sure we would all love to go with you.”
When the sloop touched Garnett and Sayer’s wharf Mrs. Farnham,
on assuring herself that Rodney was no worse after his immersion,
stepped ashore.
“I didn’t like to say so in front of Mother,” remarked Rod, as soon
as the sloop was heading back toward the Point, “but that was the

narrowest escape I’ve ever had in my life. I’d got to the stage where
I didn’t know much. By the way, I hope you’re doing good business
with the sloop.”
“Not bad,” replied the captain. “It was fairly slow at first, but the
town is pretty full of visitors now, and all the cottages on the Point
are open.”
“It must have cost you a lot to get her fixed up like this,” Rod said,
giving the vessel a comprehensive glance.
Jack smiled, and shook his head.
“It might have, if we hadn’t done the work ourselves,” he replied.
“George Santo, here, helped me a lot, and we did the whole thing
ourselves, except fixing the mast and rigging, of course.”
“But you’ve had her painted,” said Rod.
“We did that, too,” replied the skipper. “It cost us just fifty cents,
but we got the paint at a special bargain. The sails and halyards
were all I really had to buy, and I made almost enough at the ferry
in the first week to pay for those.”
“Well, she looks splendid,” said Rod, stepping off at the hotel
landing. “And—and, I’m awfully glad Dad gave her to you!”

S
CHAPTER VI
PROWLERS
ometimes Jack had to be not only skipper but mate also of the
good ship Sea-Lark, when his “crew” was otherwise engaged.
Now and then Tony Santo needed his son’s assistance in the boat-
yard. On one such occasion—it was the day following the rescue of
Rodney Farnham—a man entered the shed and addressed the boat-
builder.
“Do you rent boats here?” he asked.
“I can let you have a dory if you want to go down the creek,”
replied Tony.
The man shook his head impatiently.
“Something larger than that,” he answered. “A sailing-boat, for
instance.”
“You can’t do much sailing on the creek,” said the boat-builder.
“Why don’t you inquire along the wharves?”
“Why, I was wondering,” was the hesitating reply, “whether you
happened to have a little sloop—something I could handle by
myself.”
George observed the man curiously. He did not look like a person
who would go in for sailing, and, by the same token, he was not
particularly prepossessing. He was a little above the average height,
and his clothes, though new, did not fit him well. His manner
seemed nervous, and he fidgeted with one of the buttons on his
coat while talking.
“Nothing just now,” replied Tony.

“Do you remember a little sloop called the Sea-Lark?” asked the
stranger.
George and his father exchanged glances.
“Why, yes,” replied Tony. “Belonged to Mr. Farnham?”
“That’s right,” said the man. “What ever became of her? If I could
get her she’d be just the sort I want.”
“I don’t think money would hire her,” put in George.
“Well, you see,” explained Tony, “these boys have her. She ran
ashore in the Sangus three years ago and they got her afloat a while
ago and fixed her up.”
“What?” exclaimed the stranger, sharply. “Where is she now?”
“She’s being used as a ferry-boat, across the harbor.”
“Who owns her?” was the next query.
“Jack Holden. You’ll find him down on Garnett and Sayer’s wharf
with her ’most any time.”
“Jack Holden, eh? If he won’t hire her he might be willing to sell
her, maybe.”
“It isn’t very likely, but you can go and ask him. I guess you’ll find
him down there now.”
“Thanks,” said the man laconically, and presently went off.
But the stranger, though he went to the ferry, was in no apparent
hurry to tackle Jack on the question of hiring or buying the sloop. He
stood chatting with Cap’n Crumbie on the wharf until the Sea-Lark
returned, and then crossed to the Point and strolled off.
“That’s a rum-looking bird you took across just now,” commented
Cap’n Crumbie, as soon as Jack landed back.
“I didn’t notice him specially,” replied Jack. “At least, not at first.
He didn’t seem to be able to keep still for more than a minute. I
noticed his hands, though, when he gave me his fare. He must have

been doing some pretty hard work for a long time, and yet he wasn’t
dressed quite like a workman.”
Cap’n Crumbie grunted. He prided himself on being able to
distinguish a day tripper or a drummer from a regular visitor on
sight, and an artist from both.
“I couldn’t place him. He don’t belong here, anyway,” replied the
watchman.
“He was cross-eyed or something, wasn’t he?” Jack asked.
Cap’n Crumbie shook his head.
“No,” he replied slowly. “I know what you mean, though. It’s his
eyes that are set too close together. Don’t you never lend a quarter
to a feller whose eyes come as near each other as that, Jack, ’cause
it’s all New England to a piece o’ cheese that you’ll be twenty-five
cents short from that moment on. My guess is that if yon feller isn’t
a crook o’ some sort, he’s a mighty good imitation.”
The subject of the stranger was then dropped, but an hour later
Jack took especial notice of the man when he came on board the
ferry again at the Point, to return to town.
“Nice little boat you’ve got here,” the man observed.
“I like her very well,” replied Jack.
“She would just about suit me. I’ve been looking for a craft of this
sort. Would you like to rent her?”
“By the hour, do you mean?” Jack asked.
“Something like that. I only want to potter around.”
“I can’t do that very well,” said the captain. “I’m fairly busy in the
day time with the ferry. I could take you out some evening, though.”
“Oh, I can manage her by myself,” replied the man. “You needn’t
bother to come.”
“I wouldn’t let her go out unless I was in her. I wouldn’t trust her
to any one.”

“Huh! Well, what about selling her?”
“Not this season,” said Jack. “I have only just started this ferry and
it looks as though I might clean up something by the fall.”
“Best let me hire her,” said the man. “My name is Martin, and I
expect to be around Greenport for a while. Look here, you needn’t
be afraid of me doing any damage to her. I’ll promise not to take her
outside the breakwater, and of course if there should be any damage
I’ll make it good.”
Jack wavered for an instant, but only an instant. The sloop was by
far the most treasured possession he had ever had, and the idea of
allowing some one else to run her about, perhaps scraping her
bottom against the rocks, or even capsizing her, was distinctly
distasteful. Moreover, had not Cap’n Crumbie warned him only a little
while previously of placing much faith in such a man? As a matter of
fact, if something did happen to the Sea-Lark and this man gave him
another boat in her place, it would not be the same. He loved the
Sea-Lark for what she was, for what she had already done for him,
and because of the long hours of toil he had spent in making her
into what she was.
“No, thanks,” he said. “Any time you want to go for a sail in the
evening, after the ferry stops running at six o’clock, I’ll take you, but
I won’t let her go otherwise.”
Martin shrugged, and strolled forward for a while, after which he
went below into the little cabin, where there were one or two
passengers sitting. As the sloop neared the wharf he came on deck
again.
“Now, don’t forget what I’ve said,” he remarked. “Any time you
change your mind, let me know, see?”
“I’m not likely to, thanks,” replied Jack, surprised at the man’s
persistence.
Jack and the watchman were standing together on the wharf a
few minutes afterward, when George Santo joined them.

“Well, did you sell the Sea-Lark, Jack?” he inquired.
“Sell her? Who to?” replied the skipper.
“A man was inquiring about her,” said the mate. “He asked us all
sorts of questions at the boat-yard, and then said he was coming
down here to make a dicker with you.”
“How funny!” observed the captain of the Sea-Lark. “He must be
crazy about her. I’m not surprised, but I wonder why, all the same.
You didn’t tell him I wanted to sell her?”
“I told him money wouldn’t buy her from you.”
“Well, that’s pretty nearly true. I don’t like the chap. Nor does the
Cap’n, here. He worries me. George Santo, you’re fired! Where have
you been all this day? Here I’ve been steward, and ship’s carpenter,
and cook, and deck-hand, and cabin-boy ever since eight o’clock this
morning. I wanted to see you on a little matter of business.”
“If I’m fired, you can’t have any business with me; can he, Cap’n
Crumbie?”
“Come hither!” said Jack, catching hold of George’s ear and
leading him upon the sloop. “Step into the office. Not into the sea,
idiot! Quick march, into the cabin! Now, sit down. See,” he added,
producing a small note-book from his pocket; “I have been working
out some figures. We’re making money, son—not millions, exactly,
but we’re doing better than I ever expected. I want to have a
settling up with you. I asked Cap’n Crumbie what would be fair, and
he said you ought to have a third of the takings. The boat takes a
share, and as she’s mine, that goes to me, of course. The other third
I take.”
“But I don’t want to take a share,” George protested. “I’ve done
nothing, except play around a bit.”
“I don’t care whether you want to or not; you’re going to if I have
to give it to your father for you. Think of your starving wife and
children that you were talking about when I signed you on.”

The captain fetched out a bundle of bills and a handful of loose
silver, laid them on the table, and divided the money into three piles.
One he pushed over to his mate and the rest he stowed into his own
pocket.
“What’ll I do with all this?” asked George.
“How do I know? Found a college or something. Anyway, drop it
into your pocket now. By the way, don’t forget to report on Sunday,
in your best uniform, the one with the gold braid on it that I didn’t
buy you. The Farnhams are coming out for a sail, and I’ll need your
help, Mr. Mate.”
The sloop was tied up each night at Garnett and Sayer’s wharf,
where Cap’n Crumbie could see her during his nightly peregrinations.
Not that Jack was afraid of her being stolen, for such a thing was
unlikely, but there was always the possibility of the youthful element
of Greenport scrambling over her and doing damage.
On the morning following Rodney Farnham’s rescue, however, the
watchman reported something to the captain of the Sea-Lark which
aroused vague misgivings in him.
“What time did you go to bed last night?” asked the Cap’n, eyeing
Jack suspiciously.
“About ten o’clock. Why?”
“Umph!” snorted the watchman. “I thought maybe it was you
prowling around, having some sort of a joke; and yet I knew it was
too late for you to be up to any pranks.”
“Not a prank!” replied Jack. “I was tired and went straight to
sleep. You went to bed early too, didn’t you, George?”
The mate nodded, and the watchman pushed his cap back and
rubbed his head in a perplexed fashion.
“Blest if I know, exactly,” he said. “The sloop’s all right. I went on
board and examined her again this morning, and not a thing had
been touched.”

“Examined her again! But what happened in the night?” Jack was
now becoming concerned, in spite of the fact that the sloop lay
basking in the bright sunshine at his feet.
“’Twas about midnight, as near as I can remember,” said the
Cap’n. “I’d been having a little doze in my cubby, and I walked out
here to take a squint ’round. I’d no idea anything was wrong, mind
you. It was mighty dark, ’cause the moon hadn’t got up yet, and it
was cloudy. I was standing right here, lighting my pipe, when I
heard something down yonder at the far side of the Sea-Lark. It
wasn’t much of a noise, more like the soft bumping of a dory up
against her side than anything. P’r’aps I wouldn’t have taken any
special notice of it, only there was no wind, and as far as I could
remember nobody had left any dory near.”
“‘Hello, there!’ I calls out, not thinking anything special about it. If
I’d known then what I knew a minute later I’d ha’ been down aboard
the sloop afore you could ha’ said your own name. But I didn’t.
“There was somebody there, right on the deck of your ferry-boat,
but he didn’t say a word. I heard the bumping sound again, as
though he’d drawn a dory to the side with a jerk, and he jumped
into it. Then he rowed off quick as lightning. I hollered after him, but
he took no notice, so I got my lantern and went aboard the sloop.
The cabin door was locked, just as you always leave it. Come to
think of it, there’s nothing special any one could steal. Anyway, that’s
all that happened, but you may be sure I didn’t take no more dozes
till daybreak.”
“How queer!” commented Jack, uneasily.
“Rowed clean away, he did. Mind you, it might ha’ been some one
who’d landed there while I was dozing, and he was just putting off
again, but why did he land against the side o’ the Sea-Lark when he
could pretty near have walked onto the wharf ten yards further on?”
“And what was he doing there, anyway, at midnight?” asked Jack.
“You don’t get people prowling around the wharf very often at that
time of night, do you?”

“If I catch ’em at it you may be sure I want to know what they’re
after,” replied the watchman. “The queer thing about it was his
sliding off without saying a word when I hailed him.”
“I don’t like it,” said Jack. “There may have been nothing wrong,
of course, but, well, you see, I should feel sick if anything happened
to that boat.”
“I wonder who it could have been,” said George.
“Cap’n Crumbie, I have half a mind to spend to-night on board,”
said Jack. “I could sleep in one of the bunks in the cabin just as well
as in bed at home.”
The watchman took his pipe out of his mouth and carefully laid it
down. When he did that you knew he was thinking hard.
“There’s no need to do that, son,” he replied, “so long as I’m here.
You may depend on it I’m going to keep my eyes skinned for the
next week or so, till we get the moon again. But then again, there
wouldn’t be any harm done if you do want to sleep aboard.”
“Yes, Jack, let’s,” pleaded the mate. “I don’t think I’ve ever slept
on a boat.”
“All right,” agreed the skipper. “If we both get murdered don’t
blame me. Bring a blanket down after supper, George, and we’ll
make ourselves comfortable.”
Cap’n Crumbie lent the boys a lantern, and after wishing them a
cheery “good night,” left them alone. For about an hour they
chatted, and then, feeling sleepy, turned out the light and rolled
themselves up in their blankets. George dropped off to sleep within
a few minutes, but Jack turned about in his bunk for some time
before following suit. He did not expect his slumbers to be disturbed,
for, the more he thought about it the more he came to the
conclusion that the visitor to the sloop the previous night must have
come to the wharf for something which had nothing to do with the
Sea-Lark. There was so little on board that could be stolen. Nobody

in his senses would do such a clumsy thing as attempt to get away
with the old sails, he mused.
It was pitch-black in the cabin. Up on deck it was not much better,
for the thin crescent of a moon was not due for hours yet, and there
were clouds in the sky again to-night. Occasionally the sloop rocked
gently as the water lapped her side and burbled between her and
the wharf. It was a soft, soothing sound. Jack was perfectly
comfortable, and very happy. It was a good idea to sleep on the
boat, he reflected. The novelty of the thing appealed to him greatly.
Later, when the weather grew hot, he and George would often do it.
He wondered vaguely what Cap’n Crumbie was doing on the wharf.
Perhaps snatching forty winks in his own little snuggery. Jack felt he
couldn’t blame the Cap’n if he did snatch forty winks—fifty, if he
liked—
And then he dropped suddenly into healthy slumber.
How long he slept he had not the remotest idea, but he awoke
with a start. Something had happened, but he did not quite realize
what. That he had been awakened by something he was perfectly
sure. Almost holding his breath, and listening intently for the
slightest sound, he lay perfectly still, his eyes open, but seeing
nothing in the darkness.
After perhaps twenty seconds Jack raised himself cautiously to his
elbow, still straining his ears. Then there came again the thing which
had awakened him.
The sloop swayed, as though something were being pressed
heavily upon her side.
Silently as a shadow, Jack slipped from his bunk, and extended a
hand to awaken his chum. But on second thought he changed his
mind. George would be sure to say something if he were awakened,
and that would scare the midnight prowler off instantly.
Jack was standing in the middle of the cabin, feeling for a stout
stick which he had placed at hand before going to sleep. Then there

came a slight creaking sound from the handle of the companionway
door.
Some one outside was turning it.

J
CHAPTER VII
THE CLUE
ack’s hand closed tightly on the stick and he raised it, ready to
strike.
The door hinges creaked. Jack’s pulse was thumping as he had
never known it to do. There was, of course, the bare possibility that
this might be the watchman paying them a visit to see that all was
well, and Jack had no desire to lay the worthy Cap’n Crumbie out on
the cabin floor with a cracked skull.
“Who’s there?” he asked in a voice which he hardly recognized as
his own. The boy could not even make out the outline of the
intruder in the blackness.
There was a moment of tense silence, but only a moment. As
soon as the midnight visitor recovered from the shock of finding
some one in the cabin he closed the door with a bang just as Jack
brought down his stick sharply, but it only came in contact with the
wooden panel.
George leaped out of his bunk in alarm.
“What’s wrong?” he shouted.
Jack, however, had no time to waste on explanations. He seized
the handle and flung open the door, just in time to hear the soft
patter of bare feet along the deck, and the deep bass of Cap’n
Crumbie, up on the wharf, whom the noise had attracted.
“Hello, Jack! Are you there? What’s up?” he called down anxiously.
Jack was by now half-way across the deck, following the retreating
figure, but the mysterious visitor leaped over the side into a boat
and pushed away before the boy could get within reach.

“Somebody came into the cabin,” Jack shouted back to the
watchman. “Slip on board, and we’ll go after him on the sloop.”
“You can’t, son,” replied Cap’n Crumbie. “There ain’t enough wind.
Listen! Which way did he go?”
The watchman and the two boys strained their ears, but the
fugitive, after pulling a few strokes, had evidently dipped his oars in
the water gently. Not a sound was to be heard, save the swish of the
tide against the wharf piles and the side of the sloop.
“Well, if that don’t beat the Dutch!” exclaimed Cap’n Crumbie.
“You didn’t see him, o’ course?”
“No,” replied Jack. “I was asleep, and we had no light. If I’d been
half a second quicker I might have winged him with this stick, but I
couldn’t be sure it wasn’t you. He slammed the door in my face and
bolted as soon as I spoke.”
“I heard you call out,” said the watchman, “and that fetched me to
the side of the wharf at a run, but I’d heard nothing afore that. I got
a scare at first, ’cause I thought some one was killing the pair o’
you.”
“Nobody touched either of us, thanks,” said Jack. “It was queer,
though. The fellow never said a word. In fact, it might have been a
ghost; only I heard the creak of the door-knob when he turned it,
and I could distinctly hear him running along the deck. Ghosts don’t
patter about the deck in bare feet, do they, Cap’n Crumbie?”
“’Tain’t no ghost,” grunted the watchman. “It must be the same
chap who came aboard her last night, and ghosts don’t float around
in dories; leastwise I never heard of ’em doing it. No, it’s something
he’s after, but what in thunder that might be I dunno.”
“I wish to goodness I knew,” said Jack. “It’s—it’s worse than
ghosts. I believe it is some one who wants to steal the sloop. If they
knew how to handle her they could sail miles away before morning,
and then if they painted her name out it wouldn’t be easy to trace
her.”

“But if some one wants to steal her, why should he come into the
cabin?” asked George. “He never dreamed there might be some one
on board, and all he had to do was cast off.”
“Maybe the feller just peeped inside to make sure he wasn’t doin’
any kidnapping,” suggested the watchman. “He’d ha’ been in a rare
fix if he’d got out to sea and then found he had the owner aboard
with him all the time!”
“We’re only guessing, anyway,” said Jack. “And there’s nothing to
tell us whether we’re anywhere near the truth or not. All the same,
I’m glad I slept on board, or I don’t know what might have
happened. And here’s another thing. I’m going to sleep on board to-
morrow night, too, and every other night, for a while. You can’t sit
on the deck of the sloop all night, Cap’n Crumbie, and if some one
wasn’t right on the spot every minute I believe this mysterious chap
would get away with her.”
“I’m going to sleep on board, too,” said George.
“All right,” agreed the watchman. “’Tain’t such a bad idea, at that;
only you want to keep your light going all the time. Not that you’ll
catch anybody that way, but you’ll be safest.”
The lantern in the cabin had now been lighted, and the boys
returned to their bunks, as there seemed no likelihood of any further
excitement that night.
At dawn the skipper went on deck, and looked around as though
half expecting to find evidence of the previous night’s encounter.
Everything on the sloop was just as he had left it the previous
afternoon after his last run across the ferry. Not even—
Suddenly the boy came to a standstill and stared down, his brows
knit. Then he began to chuckle softly, and returned to the cabin.
“George, ahoy!” he said. “Wake up, lazy, and come out! I’ve
something to show you.”
The mate opened his eyes and stretched.

“What’s up now?” he asked, yawning.
“I want to offer you my compliments,” said Jack.
“Something must be wrong with you, Cap’n. You’re too polite to
me this morning.”
“No, it’s genuine gratitude,” replied the skipper. “Your father was
right when he said you couldn’t do carpentering-work for nuts.”
“Shoot!” replied George, with an air of suspicion.
“We mended that broken place on the rail together, didn’t we?”
said Jack.
“Well, you sawed the piece and I nailed it on,” agreed George.
“Yes. And not knowing better, you left the sharp end of a nail
sticking up. Come and look at it.”
George hopped out of the bunk and followed his chum on deck.
A fragment of gray cloth was adhering to the sharp point.
“It’s our ghost-trap!” said Jack.
The mate knelt down and inspected the thing curiously.
“This is where he slid over the side, and tore his coat, or his
pants, maybe,” the younger lad commented sagely. “All the same, I
don’t see how that helps us any.”
“It doesn’t, in a way,” agreed Jack. “But it’s what the detective
chaps would call a clue.”
“What to?” George asked, laughing.
“I don’t know,” replied the captain. “A clue’s a clue, chump! You’ve
got to have clues before you can catch anybody.”
“Don’t see how you can catch a ghost just because he tore his
pants on a nail,” commented George.
“Now, George Santo, do ghosts wear pants?”

“Not this season,” replied George. “Hullo, Cap’n Crumbie,” he
added, calling to the watchman who had just appeared on the edge
of the wharf. “Come and see what our ghost left behind!”
The watchman scrambled down the rough ladder on one of the
piles, and with a judicial air viewed the fragment of cloth.
“Aye,” he said at length, “that’s just about where he slid over the
side the night afore. But I reckon we’ve seen the last o’ that
customer.”
“You mean you don’t think he’ll come back?” queried Jack.
The watchman slowly nodded his head.
“It’s a pretty poor sort o’ fish that bites at the bait a second time,
after feelin’ the hook,” he commented. “An’ if I’m any judge, this
isn’t a fish o’ that kind. He’s cute. Nobody’s seen him. Nobody’s
heard him speak. There’s a hundred million people in the United
States, and so far as you or I know, it might be any one of ’em. All
we got is a bit of his pants to go by, and if you arrested every man
in Greenport who has met with a little accident o’ that kind, we’d
have the jail full. No, Jack, your fish has got away this time, an’ if he
comes back it won’t be in the same way; you mark my words.”
“I shall sleep on board, though,” declared the captain of the sloop.
“Sure thing! That’s the only way to keep him off. What licks me is,
what’s he after?”
“There’s something queer about it all,” commented Jack, puzzled.
“Maybe that’s the last we shall see of the chap, though.”
“But you didn’t see him,” replied Cap’n Crumbie. “That’s where
he’s clever.”
That evening the two boys returned to the sloop after supper, Jack
determined to defend his own property if necessary, and George
equally determined to stand by his chum. They took something on
board to read, and settled themselves comfortably. Presently,

however, George threw down his book. Fiction seemed tame
compared with the possibilities around him.
“I asked Dad to-day if he’d lend us his revolver,” the mate said.
“But he didn’t seem to fancy the idea.”
“What was he afraid of? That we might shoot ourselves?”
“I don’t think that was it,” replied George. “He’s afraid one of us
might blaze away at the first person who came on board, and make
an awful mess of the wrong party.”
“That would be awkward, for the wrong party. After all, I’d rather
depend on this stick. I’d pity any one who got a real crack from it. I
was thinking just now, though, George, it mightn’t be a bad idea to
tell the police what’s happened.”
“Oh, they’d only laugh at us.”
“Why?”
“Well, because. We’ve got nothing to tell them, really. A man came
aboard one night and tore his clothes on a nail. What about it?
They’d tell you nobody could be arrested for that.”
Jack drummed his fingers thoughtfully on the top of the table.
“I don’t care whether they laugh or not,” he said at length. “I’m
going to report what happened. Maybe they can see further through
a brick wall than I can. That’s what they’re for. I’m going now.
Coming up with me?”
George reached for his shoes, and three minutes later the boys
were on their way to the police station. In the grim and unfamiliar
surroundings of the chief’s office, where the boys were received,
Jack felt a little less sure of himself.
“What can I do for you?” asked the officer.
“You know the Sea-Lark, the boat I’m using for the ferry?” Jack
asked.

The chief nodded, and tapped a writing-pad on his desk with the
point of a pencil. Though attentive, he was not much concerned, for
other affairs were pressing.
“Well, some mysterious person has been coming on board her at
night,” said Jack.
“What sort of a person?” asked the chief, stifling a yawn.
“I don’t know exactly. It was dark, and we couldn’t see him.”
“Well, what happened?”
“Why, nothing, exactly,” replied Jack. “It was about midnight and I
heard some one prowling about on the deck. He opened the
companionway door into the cabin and I jumped out of my bunk,
ready to hit him with a stick, but he bolted.”
“Were you attacked?” There was something extremely matter-of
fact about the direct question.
“I didn’t get hurt, if that is what you mean.”
“But were you attacked? Did this mysterious person attempt to
strike you or anything like that?”
“He didn’t have time. You see I was ready for him with the stick
when he opened the door.” Jack was a little discouraged by the lack
of interest which the chief displayed. The latter seemed to be
preoccupied and quite without sympathy.
“Did this person steal anything?”
“No. There wasn’t much he could have stolen.”
“Then all it amounts to is this: Somebody walked across the deck
of your sloop in the early hours of the morning and opened the door
of the cabin. You haven’t got much of a case for us to handle, young
man.” He smiled, but there was something rather ironical about that
smile. “Even if we found this midnight visitor of yours—which I
hardly think is likely, as you don’t know what he looks like, and you
don’t really know whether it’s a man or a woman—what would you

like us to charge him with? Certainly not theft. And you know as well
as I do that there isn’t anything so very peculiar about a man
walking across the deck of another man’s boat, whatever the time of
day or night. I’ve done it myself, dozens of times. Sometimes one
has to, to get ashore.”
“But he opened the door of the cabin.”
The chief shrugged.
“Well, what of it?” he queried. “It may have been some sailor or
fisherman who was curious to see what it looked like inside. Or,
again, it may have been some one who was looking for a place to
sleep for an hour or two, and he never dreamed there was any one
aboard.”
“It doesn’t sound very much, if you look at it like that, does it?”
Jack said, nonplussed by the cold and logical attitude of the chief.
“But I thought we ought to come up and let you know.”
“That’s all right,” replied the official. “But I guess there’s nothing
to be alarmed about.”
“Oh, I forgot,” said Jack, feeling in his pocket, “we found a sort of
a clue. The man tore his clothes on a nail as he slipped over the
side, and next morning this was sticking on the nail.”
The chief examined the scrap of material gravely for a moment.
“It’s a wonder he didn’t come back and kick up a row with you for
leaving nails sticking up,” he said, handing back the fragment of
cloth. “If I were you I’d say nothing more about that, or you’ll may
be having some one come and pitch into you.”
Jack bit his lip. Evidently he was wasting his time here, and the
off-hand manner of the chief gave him no particular reassurance.
“I should be rather pleased if the man who got on to that nail did
come and kick up a row,” he said. “Then I should know who it was.”
“How would that help you? He’s done nothing unlawful, as far as I
can make out.”

“I suppose he hasn’t really,” Jack was compelled to admit. “All the
same, I’m glad I came up and told you.”
“Don’t you worry, son,” said the chief, rising from his chair as a
signal that the interview was over. “If anything more happens,
though, you let me know.”
“Thank you,” said Jack, dubiously, turning toward the door.
“When you come to think of it,” observed George, as they walked
in the direction of the boat, “we hadn’t an awful lot to complain of,
had we?”
“I don’t know about that,” replied Jack. “It doesn’t sound very
serious when you have to admit that no actual crime has been
committed. I’m not at all satisfied. I was going to tell the chief about
that man Martin, but I saw it wasn’t any use. My guess is as good as
any one else’s, and my guess is that Martin was the man who tore
something or other on that nail. I’ve got no real reason for saying
so, mind you, and perhaps it isn’t fair to Martin to suspect him, but
there isn’t any one else to suspect.”
“I looked as closely as I could to-day at his coat and pants,” said
George, “in case there was any sign of a tear.”
“So did I. I didn’t see anything, of course.”
“No.”
“What did you notice, though?” Jack asked. “I mean something
that fitted in with the clue?”
“Nothing.”
“Well, I could swear he had a different suit on from the one he
generally wears,” Jack declared. “Unfortunately I hadn’t taken
particular notice before.”
“Now you mention it, I believe that’s right, too,” agreed George.
“But I know what the police would tell you if you pointed that out.
They’d say a man couldn’t be arrested for having two suits of

clothes. And he couldn’t, of course, or else both you and I would be
in prison.”
That night Jack decided not to keep the lantern burning. As he
explained to the mate, they were not sleeping on board so much for
the purpose of keeping people off the boat, as to find out who it was
who was displaying such peculiar interest in her. They stayed awake
until rather late, chatting, with occasional pauses in which they both
listened intently when some trifling sound caught their ears, but
toward twelve o’clock both dropped off to sleep, and awoke next
morning without having been disturbed.
When the following Sunday came the weather was perfect, and
Tony gave his young apprentices permission to take Mrs. Farnham
and her family outside the breakwater. They sailed past Greenport
Lighthouse on the tip of the Point, and manœuvered for an hour or
two in the broad ocean. Mrs. Farnham expressed herself as
delighted with the trip, and Rodney, who had rarely been in a
sailing-craft since his father had acquired their motor-boat, declared
he was as much in love with the old Sea-Lark as ever.
“If you like her as much as that,” said Jack, jokingly, “you had
better sign on as one of my crew.”
“I would, like a shot, if you’d let me,” replied Rod.
“Well, if you mean that, report for duty in the morning. My mate
won’t be able to help, as he has to do something for his father, and I
expect we shall be pretty busy at the ferry.”
“You don’t mind, do you, Mother?” asked Rod.
“Not if it amuses you,” replied Mrs. Farnham. “I would rather trust
you in the Sea-Lark than in that canoe of yours, any time.”
And in this way Rodney Farnham was unofficially “signed on.” The
more Jack knew the city lad the more he liked him. They were about
the same age, and had very similar tastes, and they became
excellent companions, despite the fact that one was working hard
through the vacation to help his father, and the other attended an

expensive New York school and could have spent most of his time,
had he chosen, in rolling about in a luxurious limousine. But the sea
had a fascination for Rod. He was never so happy as when, dressed
in a flannel shirt, more-or-less-white trousers, and sneakers, he
stood on the swaying deck of the little sloop, jumping to obey the
captain’s orders and feeling the sting of the fresh salt air on his
cheeks. He and George, also, became chums, and the three boys
spent many a happy hour on the sloop. Their trips in her, now, were
not always limited to the regular run between Garnett and Sayer’s
wharf and the Point, for Tony considered they were perfectly capable
of sailing out beyond the breakwater, in favorable weather, so long
as they kept within a mile or so of shore; and Cap’n Crumbie was
not long in arranging for them to take out occasional pleasure
parties. Sometimes during the evenings and on Sundays they ran
down the coast, almost as far as Mackerel Point, and at others,
when the wind was more suitable, they chose the direction of Indian
Head, there to run within a mile or two of the place where the now
dancing Sea-Lark had lain so long in her sandy bed.
Once, when the sloop was gliding under Indian Head, Jack looked
up at its well-remembered outline, and his fancy drifted back to
other days.
“Rod, have you ever been an Injun?” he asked.
“How do you mean? Played at being one?”
“Yes. In full war-paint and feathers, scalping the enemy, and
hunting buffalo, and taking hostages, and following the trail of
palefaces, and tomahawking them?”
“No,” said Rod. “I’d have liked it finely, but we never seemed to
get a chance to hunt even that sort of buffalo in New York. I wish I
had.”
“See that headland?” the skipper queried. “That’s the place where
Sitting Bull and White Fox made their famous stand, with their backs
to the edge of the cliff. The Iroquois had attacked them in
thousands, and killed all the defenders’ braves. But Sitting Bull and

White Fox outwitted the enemy. They had a trap laid, and the
invaders all fell into a hole, where they were left to die, and Sitting
Bull and White Fox lived happily ever after.”
“They must have been lonely,” commented Rod. “I’ve never heard
of this bit of history. What sort of a trap was it?”
“I don’t exactly remember,” replied Jack. “It must have been about
eight years ago. There’s White Fox sitting on the deck-house now,
laughing at you. Beat him on the head with a belaying-pin for me,
will you, please? That’s the place where we used to play Injuns
when we were kids.”
More than once, these days, Jack came across the man named
Martin who had asked the captain to sell the Sea-Lark. He crossed in
the ferry occasionally, apparently going for the sail only, as he either
returned to the town without going ashore or strolled aimlessly
about until the sloop returned to the Point. Jack’s instinctive dislike
for the fellow deepened, a state of affairs which was by no means
remedied by Martin’s attempts to get on a friendly footing with the
owner of the sloop. His manner was difficult to understand. He was
impudent, in a way, and yet he cringed; and it was his cringing more
than his impudence which made him repellent to Jack.
“Why does that chap hang ’round so much?” Rod asked one day.
“Nobody knows. He’s a mystery to me,” replied Jack.
“I’d like a little accident to happen while he was standing on the
edge of the wharf,” observed Rod, quietly. “If I should happen to trip
and bump into him so that he fell over, he wouldn’t have quite such
a mean smile when we fished him out.”
“Better not,” replied Jack, reluctantly. “After all, he isn’t doing any
harm, but I wish he’d find some other wharf to loaf about on.
Sometimes I feel as though he were trying to hypnotize me as he
stands and stares down at us. The worst of it is you can’t go up to a
man and ask him what in thunder he means by looking at you,
especially when you’re running a public ferry.”

“No,” replied Rod, “but there’s no law in the world to prevent me
from accidentally tripping up and giving him a ducking. He’d find
somewhere else to stand around after that.”
“Suppose he couldn’t swim! No, I’d love to do it, but it’s too risky.
Maybe he’s a detective, for all we know, waiting at the ferry to catch
some one. Leave him alone for the present. The thing is beginning
to get interesting.”
And it grew still more interesting within an hour or so of that
conversation. Jack and the two boys had just returned from a run
over to the Point with a boat-load of passengers, when Cap’n
Crumbie waved his hand to the skipper, from the wharf. The lads
trooped up together.
“Something’s up!” said the watchman, with a mysterious air,
glancing toward two retreating figures which at that moment
disappeared round the corner into Main Street.

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