Consolidation Working Paper One Year after Acquisition, Bargain Purchase

On January 1, 2019, Paxon Corporation acquired 90 percent of the outstanding common stock of Saxon Company for $1,520 million cash. The fair value of the 10 percent noncontrolling interest in Saxon was estimated to be $180 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, 2019, appear below:

	Dr(Cr)
(in millions)	Paxon	Saxon
Cash and receivables	$3,370	$800
Inventory	2,260	940
Equity method investments	--	--
Investment in Saxon	1,942.2	--
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	(412.2)	--
Gain on acquisition	(100)	--
Gain on sale of securities	--	(10)
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
Total	$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 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 acquisition
Acquisition cost
Fair value of noncontrolling interest
Book value
Revaluations:
Inventory
Equity method investments
Land
Building and equipment
Identifiable intangibles
Gain on acquisition

(b) Prepare a schedule calculating the equity in net income of Saxon for 2019, reported on Paxons books, and the noncontrolling interest in net income for 2019, to be reported on the consolidated income statement for 2019.

• Use negative signs with answers that reduce net income amounts.
• Enter answers in millions, using decimal places, if appropriate.

(in millions)	Total	Equity in NI	Noncontrolling interest in NI
Saxon's reported net income for 2019
Revaluation write-offs
Inventory
Equity method investments
Buildings and equipment
Identifiable intangibles

(c) Prepare 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.
• Enter answers in millions, using decimal places, if appropriate.

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	$3,370	$800
Inventory	2,260	940	(O-1)			(R)
Equity method investments	-	-	(O-2)			(R)
Identifiable intangible assets	-	-	(R)			(O-4)
Investment in Saxon	1,942.2	-				(C)
						(E)
						(R)
Land	650	300	(R)
Buildings and equipment, net	3,600	1,150	(R)			(O-3)
Current liabilities	(2,020)	(1,200)
Long-term debt	(5,000)	(450)
Common stock	(500)	(100)	(E)
Additional paid-in capital	(1,200)	(350)	(E)
Retained earnings, Jan. 1	(2,410)	(845)	(E)
Noncontrolling interest	-	-				(E)
						(R)
						(N)
Dividends	500	100				(C)
						(N)
Sales revenue	(30,000)	(10,000)
Equity in net income of Saxon	(412.2)	-	(C)
Gain on acquisition	(100)
Gain on sale of securities	--	(10)				(O-2)
Cost of goods sold	26,000	8,000				(O-1)
Depreciation and amortization expense	300	40	(O-3)
			(O-4)
Interest expense	250	25
Other operating expenses	2,770	1,600
Noncontrolling interest in NI	-	-	(N)		-
Total	$0	$0