Consolidated Balance Sheet Working Paper, Bargain Purchase

On December 31, 2012, Paxon Corporation acquired all of the outstanding common stock of Saxon Company for $1.08 billion cash. Paxon uses the complete equity method to report its investment. The trial balances of Paxon and Saxon at December 31, 2013, are shown below:

	Dr(Cr)
(in millions)	Paxon	Saxon
Cash and receivables	$1,860	$480
Inventory	1,356	564
Marketable securities	--	--
Investment in Saxon	1,295	--
Land	390	180
Buildings and equipment (net)	2,160	690
Current liabilities	(1,212)	(720)
Long-term debt	(3,000)	(270)
Common stock, par value	(300)	(60)
Additional paid-in capital	(720)	(210)
Retained earnings, January 1	(1,566)	(507)
Dividends	300	60
Sales revenue	(18,000)	(6,000)
Equity in net income of Saxon	(155)	--
Gain on sale of securities	--	(6)
Cost of goods sold	15,600	4,800
Depreciation expense	180	24
Interest expense	150	15
Other operating expenses	1,662	960
Totals	$0	$0

Several of Saxon's assets and liabilities had fair values different from their book values at the acquisition date, as follows:

(in millions)	Fair Value less Book Value
Inventory (FIFO)	$60
Marketable securities (sold in 2013)	(30)
Land	147
Buildings and equipment, net (20 years, straight-line)	180
Long-term debt (5 years, straight-line)	(66)

(a) Prepare a schedule to compute equity in net income of Saxon for 2013, and the December 31, 2013, balance for the Investment in Saxon, as reported on Paxon's books.

Enter all answers in millions and round all answers to the nearest million.

Use negative signs with answers that reduce equity in net income.

Calculation of Equity in Net Income for 2013 (in millions)
Saxon's reported net income for 2013	$Answer
Revaluation writeoffs:
Inventory	Answer
Marketable securities	Answer
Buildings and equipment	Answer
Long-term debt	Answer
Equity in net income of Saxon	$Answer

Calculation of investment balance for December 31, 2013 (in millions).

1. Calculate gain on acquisition

When appropriate, use negative signs with your excess of fair value over book value answers (left column only). Do not use negative signs with your answers in the right column.

Acquisition cost		$Answer
Book value		Answer
Excess of acquisition cost over book value		Answer
Excess of fair value over book value:
Inventory	$Answer
Marketable securities	Answer
Land	Answer
Buildings and equipment	Answer
Long-term debt	Answer	Answer
Gain on acquisition		$Answer

2. Prepare the journal entry made by Paxon to record the acquisition (in millions).

General Journal
Description	Debit	Credit
AnswerInvestment in SaxonGain on acquisitionGoodwillEquity in net income for Saxon	Answer	Answer
Cash	Answer	Answer
AnswerInvestment in SaxonGain on acquisitionGoodwillEquity in net income for Saxon	Answer	Answer

Use negative signs with answers that reduce the investment balance.

Calculation of Investment Balance, December 31, 2013
(in millions)
Investment balance, December 31, 2012	$Answer
Equity in net income for 2013	Answer
Dividends for 2013	Answer
Investment balance, December 31, 2013	$Answer

(b) Use a working paper to consolidate the trial balances of Paxon and Saxon at December 31, 2013.

Remember to use negative signs with your credit balance answers in the Consolidated Balances column.

Consolidation Working Paper
	Accounts Taken From Books		Eliminations
(in millions)	Paxon Dr (Cr)	Saxon Dr (Cr)		Debit	Credit		Consolidated Balances Dr (Cr)
Cash and receivables	$1,860	$480					$Answer
Inventory	1,356	564	(R)	Answer	Answer	(O-1)	Answer
Marketable securities	-	-	(O-2)	Answer	Answer	(R)	Answer
Investment in Saxon	1,295	-			Answer	(C)	Answer
					Answer	(E)
					Answer	(R)
Land	390	180	(R)	Answer			Answer
Buildings and equipment, net	2,160	690	(R)	Answer	Answer	(O-3)	Answer
Current liabilities	(1,212)	(720)					Answer
Long-term debt	(3,000)	(270)	(R)	Answer	Answer	(O-4)	Answer
Common stock	(300)	(60)	(E)	Answer			Answer
Additional paid-in capital	(720)	(210)	(E)	Answer			Answer
Retained earnings, Jan. 1	(1,566)	(507)	(E)	Answer			Answer
Dividends	300	60			Answer	(C)	Answer
Sales revenue	(18,000)	(6,000)					Answer
Equity in net income of Saxon	(155)	-	(C)	Answer			Answer
Gain on sale of securities	-	(6)			Answer	(O-2)	Answer
Cost of goods sold	15,600	4,800	(O-1)	Answer			Answer
Depreciation expense	180	24	(O-3)	Answer			Answer
Interest expense	150	15	(O-4)	Answer			Answer
Other operating expenses	1,662	960		-	-		Answer
Total	$0	$0		$Answer	$Answer		$Answer

(c) Prepare the consolidated balance sheet and statement of income and retained earnings at December 31, 2013.

For all your answers below, do not use negative signs.

Consolidated Income Statement
Year Ended December 31,2013
(in millions)
Sales		$Answer
Cost of goods sold		Answer
Gross margin		Answer
Operating expenses:
Depreciation expense	$Answer
Interest expense	Answer
Other operating expenses	Answer	Answer
Income before other gains		Answer
Gain on sale of securities		Answer
Net income		$Answer

Consolidated Balance Sheet December 31, 2013
(in millions)
Assets
Cash and receivables	$Answer
Inventory	Answer
Land	Answer
Buildings and equipment, net	Answer
Total assets	$Answer
Liabilities and Stockholders' Equity
Current liabilities	$Answer
Long-term debt	Answer
Common stock	Answer
Additional paid-in capital	Answer
Retained earnings	Answer
Total liabilities and stockholders' equity	$Answer