Consolidated Balance Sheet Working Paper, Bargain Purchase

On December 31, 2012, Paxon Corporation acquired all of the outstanding common stock of Saxon Company for $0.9 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	$1,550	$400
Inventory	1,130	470
Equity method investments	--	--
Investment in Saxon	1,078	--
Land	325	150
Buildings and equipment (net)	1,800	575
Current liabilities	(1,010)	(600)
Long-term debt	(2,500)	(225)
Common stock, par value	(250)	(50)
Additional paid-in capital	(600)	(175)
Retained earnings, January 1	(1,205)	(423)
Dividends	250	50
Sales revenue	(15,000)	(5,000)
Equity in net income of Saxon	(128)	--
Gain on sale of securities	--	(5)
Gain on acquisition	(100)	--
Cost of goods sold	13,000	4,000
Depreciation expense	150	20
Interest expense	125	13
Other operating expenses	1,385	800
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)	$50
Equity method investments (sold in 2013)	(25)
Land	122
Buildings and equipment, net (20 years, straight-line)	150
Long-term debt (5 years, straight-line)	(55)

(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.

Instructions:

1. Enter all answers in millions. Round all answers to the nearest million, when appropriate.
2. Use negative signs with answers that reduce equity in net income and the investment account balance.

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

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	$1,550	$400					Answer
Inventory	1,130	470	(R)	Answer	Answer	(O-1)	Answer
Equity method investments	-	-	(O-2)	Answer	Answer	(R)	Answer
Investment in Saxon	1,078	-			Answer	(C)	Answer
					Answer	(E)
					Answer	(R)
Land	325	150	(R)	Answer			Answer
Buildings and equipment, net	1,800	575	(R)	Answer	Answer	(O-3)	Answer
Current liabilities	(1,010)	(600)					Answer
Long-term debt	(2,500)	(225)	(R)	Answer	Answer	(O-4)	Answer
Common stock	(250)	(50)	(E)	Answer			Answer
Additional paid-in capital	(600)	(175)	(E)	Answer			Answer
Retained earnings, Jan. 1	(1,205)	(423)	(E)	Answer			Answer
Dividends	250	50			Answer	(C)	Answer
Sales revenue	(15,000)	(5,000)					Answer
Equity in net income of Saxon	(128)	-	(C)	Answer			Answer
Gain on sale of securities	-	(5)			Answer	(O-2)	Answer
Gain on acquisition	(100)						Answer
Cost of goods sold	13,000	4,000	(O-1)	Answer			Answer
Depreciation expense	150	20	(O-3)	Answer			Answer
Interest expense	125	13	(O-4)	Answer			Answer
Other operating expenses	1,385	800		-	-		Answer
Total	$0	$0		Answer	Answer		Answer

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

INSTRUCTIONS: Do not use negative signs with any of your answers below for the balance sheet and income statement.

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
Gain on acquisition		Answer
Net income		Answer

HINT: The answer for Retained Earnings is $1,523.

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