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)	Paxon	Saxon
Cash and receivables	$3,225	$855
Inventory	2,260	530
Equity method investments	--	--
Investment in Saxon	2,441.5	--
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)	(50)
Additional paid-in capital	(1,200)	(200)
Retained earnings, January 1	(2,410)	(600)
Dividends	500	250
Sales 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 sold	26,000	8,500
Depreciation and amortization expense	300	40
Interest expense	250	25
Other operating expenses	2,770	3,000
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 2022)	$(400)
Equity method investments(sold in 2022)	100
Land	275
Buildings and equipment, net (20 years, straight-line)	500

In 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 acquisition
Acquisition cost		Answer
Fair value of noncontrolling interest		Answer
		Answer
Book value	Answer
Revaluations:
Inventory	Answer
Equity method investments	Answer
Land	Answer
Building and equipment	Answer
Identifiable intangibles	Answer	Answer
Gain on acquisition		Answer

(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 NI	Noncontrolling interest in NI
Saxon's reported net income for 2022	Answer	Answer	Answer
Revaluation write-offs
Inventory	Answer	Answer	Answer
Equity method investments	Answer	Answer	Answer
Buildings and equipment	Answer	Answer	Answer
Identifiable intangibles	Answer	Answer	Answer
	Answer	Answer	Answer

(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 Books	Eliminations
(in millions)	Paxon Dr (Cr)	Saxon Dr (Cr)		Debit	Credit		Consolidated Balances Dr (Cr)
Cash and receivables	$3,225	$855					Answer
Inventory	2,260	530	(O-1)	Answer	Answer	(R)	Answer
Equity method investments	-	-	(R)	Answer	Answer	(O-2)	Answer
Identifiable intangible assets	-	-	(R)	Answer	Answer	(O-4)	Answer
Investment in Saxon	2,441.5	-			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
Current liabilities	(2,020)	(1,200)					Answer
Long-term debt	(5,000)	(450)					Answer
Common stock	(500)	(50)	(E)	Answer			Answer
Additional paid-in capital	(1,200)	(200)	(E)	Answer			Answer
Retained earnings, Jan. 1	(2,410)	(600)	(E)	Answer			Answer
Noncontrolling interest	-	-			Answer	(E)	Answer
					Answer	(R)
					Answer	(N)
Dividends	500	250			Answer	(C)	Answer
					Answer	(N)
Sales revenue	(30,000)	(12,000)					Answer
Equity in net income of Saxon	(616.5)	-	(C)	Answer			Answer
Gain on acquisition	(250)						Answer
Gain on sale of securities	--	(150)	(O-2)	Answer			Answer
Cost of goods sold	26,000	8,500			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	3,000					Answer
Noncontrolling interest in NI	-	-	(N)	Answer	-		Answer
Total	$0	$0		Answer	Answer		Answer