Consolidation Working Paper One Year after Acquisition, Bargain Purchase

On December 31, 2012, Paxon Corporation acquired 90 percent of the outstanding common stock of Saxon Company for $648,000,000 cash. The fair value of the 10 percent noncontrolling interest in Saxon was estimated to be $72,000,000 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, 2013, appear below:

	Dr(Cr)
(in millions)	Paxon	Saxon
Cash and receivables	$1,308	$320
Inventory	904	376
Equity method investments	--	--
Investment in Saxon	784.88	--
Land	260	120
Buildings and equipment, net	1,440	460
Current liabilities	(808)	(480)
Long-term debt	(2,000)	(180)
Common stock, par value	(200)	(40)
Additional paid-in capital	(480)	(140)
Retained earnings, January 1	(1,044)	(338)
Dividends	200	40
Sales revenue	(12,000)	(4,000)
Equity in net income of Saxon	(92.88)	--
Gain on sale of securities	--	(4)
Gain on acquisition	(100)	--
Cost of goods sold	10,400	3,200
Depreciation expense	120	16
Interest expense	100	10
Other operating expenses	1,108	640
Total	$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)	$40
Equity method investments (sold in 2013)	(20)
Land	98
Buildings and equipment, net (20 years, straight-line)	120
Long-term debt (5 years, straight-line)	(44)

(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.

\begin{tabular}{|c|c|c|} \hline \multicolumn{3}{|c|}{ Calculation of gain on acquisition } \\ \hline Acquisition cost & & 648 \\ \hline Fair value of noncontrolling interest & & 72 \\ \hline & & 720 \\ \hline Book value & 518 & \\ \hline Excess of fair value over book value: & & \\ \hline Inventory & 40 & \\ \hline Equity method investments & (20) & \\ \hline Land & 98 & \\ \hline Building and equipment & 120 & \\ \hline Long-term debt (discount) & 44 & 282x \\ \hline Gain on acquisition & & 80 \\ \hline \end{tabular} amr