Consolidated Balance Sheet Working Paper, Bargain Purchase

On January 1, 2019, Paxon Corporation acquired all of the outstanding common stock of Saxon Company for $1.7 billion cash. Paxon uses the complete equity method to report its investment. The trial balances of Paxon and Saxon at December 31, 2019, are shown below:

	Dr(Cr)
(in millions)	Paxon	Saxon
Cash and receivables	$3,200	$800
Inventory	2,260	940
Equity method investments	--	--
Investment in Saxon	2,158	--
Land	650	300
Buildings and equipment (net)	3,600	1,150
Current liabilities	(2,020)	(1,200)
Long-term debt	(5,000)	(450)
Common stock, par value	(500)	(100)
Additional paid-in capital	(1,200)	(350)
Retained earnings, January 1	(2,410)	(845)
Dividends	500	100
Sales revenue	(30,000)	(10,000)
Equity in net income of Saxon	(458)	--
Gain on sale of securities	--	(10)
Gain on acquisition	(100)	--
Cost of goods sold	26,000	8,000
Depreciation and amortization expense	300	40
Interest expense	250	25
Other operating expenses	2,770	1,600
Totals	$0	$0

Several of Saxons assets had fair values different from their book values at the acquisition date, as follows:

(in millions)	Fair Value less Book Value
Inventory (FIFO) (sold in 2019)	$(100)
Equity method investments(sold in 2019)	(50)
Land	245
Buildings and equipment, net (20 years, straight-line)	300

In addition, Saxon had previously unrecorded identifiable intangible assets valued at $110 million, with a 5-year life, straight-line.

Required

a. Prepare a schedule to compute equity in net income of Saxon for 2019, and the December 31, 2019 balance for Investment in Saxon, as reported on Paxons 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 2019 (in millions)
Saxon's reported net income for 2019	Answer
Revaluation write-offs:
Inventory	Answer
Equity method investments	Answer
Buildings and equipment	Answer
Identifiable intangibles	Answer
Equity in net income of Saxon	Answer

Calculation of Investment Balance, December 31, 2019
(in millions)
Investment balance, January 1, 2019	Answer
Equity in net income for 2019	Answer
Dividends for 2019	Answer
Investment balance, December 31, 2019	Answer

(b) Use a working paper to consolidate the trial balances of Paxon and Saxon at December 31, 2019.

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	$3,200	$800					Answer
Inventory	2,260	940	(O-1)	Answer	Answer	(R)	Answer
Long term investments	--	--	(O-2)	Answer	Answer	(R)	Answer
Investment in Saxon	2,158	--			Answer	(C)	Answer
					Answer	(E)
					Answer	(R)
Land	650	300	(R)	Answer			Answer
Buildings and equipment, net	3,600	1,150	(R)	Answer	Answer	(O-3)	Answer
Identifiable intangibles	--	--	(R)	Answer	Answer	(O-4)	Answer
Current liabilities	(2,020)	(1,200)					Answer
Long-term debt	(5,000)	(450)	(R)				Answer
Common stock	(500)	(100)	(E)	Answer			Answer
Additional paid-in capital	(1,200)	(350)	(E)	Answer			Answer
Retained earnings, Jan. 1	(2,410)	(845)	(E)	Answer			Answer
Dividends	500	100			Answer	(C)	Answer
Sales revenue	(30,000)	(10,000)					Answer
Equity in net income of Saxon	(458)	--	(C)	Answer			Answer
Gain on sale of securities	--	(10)			Answer	(O-2)	Answer
Gain on acquisition	(100)						Answer
Cost of goods sold	26,000	8,000			Answer	(O-1)	Answer
Depreciation and amortization expense	300	40	(O-3)	Answer			Answer
			(O-4)	Answer
Interest expense	250	25					Answer
Other operating expenses	2,770	1,600		-	-		Answer
Total	$0	$0		Answer	Answer		Answer

(c) Prepare the consolidated balance sheet at December 31, 2019, and the consolidated income statement for 2019.

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, 2019
(in millions)
Sales		Answer
Cost of goods sold		Answer
Gross margin		Answer
Operating expenses:
Depreciation and amortization 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

Consolidated Balance Sheet December 31, 2019
(in millions)
Assets
Cash and receivables	Answer
Inventory	Answer
Land	Answer
Buildings and equipment, net	Answer
Identifiable intangibles	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 shareholders' equity	Answer