Question
Consolidation Working Paper One Year after Acquisition, Bargain Purchase On January 1, 2022, Paxon Corporation acquired 90 percent of the outstanding common stock of Saxon
Consolidation Working Paper One Year after Acquisition, Bargain Purchase
On January 1, 2022, Paxon Corporation acquired 90 percent of the outstanding common stock of Saxon Company for $1.8 billion cash. The fair value of the 10 percent noncontrolling interest in Saxon was estimated to be $150 million at the date of acquisition. Paxon uses the complete equity method to report its investment. The trial balances of Paxon and Saxon at December 31, 2022, appear below:
Dr(Cr)(in millions)PaxonSaxonCash and receivables$3,225$855Inventory2,260530Equity method investments----Investment in Saxon2,441.5--Land650300Buildings and equipment, net3,6001,150Current liabilities(2,020)(1,200)Long-term debt(5,000)(450)Common stock, par value(500)(50)Additional paid-in capital(1,200)(200)Retained earnings, January 1(2,410)(600)Dividends500250Sales revenue(30,000)(12,000)Equity in net income of Saxon(616.5)--Gain on acquisition(250)--Gain on sale of securities--(150)Cost of goods sold26,0008,500Depreciation and amortization expense30040Interest expense25025Other operating expenses2,7703,000Total$0$0
Several of Saxons assets had fair values different from their book values at the acquisition date, as follows:
(in millions)Fair Value less Book ValueInventory (FIFO) (sold in 2022)$(400)Equity method investments(sold in 2022)100Land275Buildings and equipment, net (20 years, straight-line)500In addition, Saxon had previously unrecorded identifiable intangible assets valued at $875 million, with a 5-year life, straight-line.
Required
(a) Prepare a schedule computing the gain on acquisition.
- When appropriate, use negative signs with your revaluation answers (left column only).
- Do not use negative signs with your answers in the right column.
- Enter answers in millions, using decimal places, if appropriate.
Calculation of gain on acquisitionAcquisition cost
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Fair value of noncontrolling interest
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Book value
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Revaluations: Inventory
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Equity method investments
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Land
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Building and equipment
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Identifiable intangibles
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Gain on acquisition
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(b) Prepare a schedule calculating the equity in net income of Saxon for 2022, reported on Paxons books, and the noncontrolling interest in net income for 2022, to be reported on the consolidated income statement for 2022.
- Use negative signs with answers that reduce net income amounts.
- Enter answers in millions, using decimal places, if appropriate.
(in millions) Total Equity in NINoncontrolling interest in NISaxon's reported net income for 2022
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Revaluation write-offs Inventory
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Equity method investments
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Buildings and equipment
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Identifiable intangibles
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(c) Prepare a working paper to consolidate the trial balances of Paxon and Saxon at December 31, 2022.
- Remember to use negative signs with your credit balance answers in the Consolidated Balances column.
- Enter answers in millions, using decimal places, if appropriate.
Consolidation Working Paper Accounts Taken From BooksEliminations (in millions) Paxon Dr (Cr) Saxon Dr (Cr) Debit Credit Consolidated Balances Dr (Cr)Cash and receivables$3,225$855
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Inventory2,260530(O-1)
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(R)
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Equity method investments--(R)
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(O-2)
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Identifiable intangible assets--(R)
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(O-4)
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Investment in Saxon2,441.5-
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(C)
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(E)
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(R) Land650300(R)
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Buildings and equipment, net3,6001,150(R)
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(O-3)
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Current liabilities(2,020)(1,200)
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Long-term debt(5,000)(450)
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Common stock(500)(50)(E)
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Additional paid-in capital(1,200)(200)(E)
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Retained earnings, Jan. 1(2,410)(600)(E)
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Noncontrolling interest--
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(E)
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(R)
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(N) Dividends500250
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(C)
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(N) Sales revenue(30,000)(12,000)
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Equity in net income of Saxon(616.5)-(C)
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Gain on acquisition(250)
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Gain on sale of securities--(150)(O-2)
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Cost of goods sold26,0008,500
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(O-1)
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Depreciation and amortization expense30040(O-3)
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(O-4)
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Interest expense25025
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Other operating expenses2,7703,000
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Noncontrolling interest in NI--(N)
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-
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Total$0$0
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