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 $$1,215,000,000$ cash. The fair value of the $10$ percent noncontrolling interest in Saxon was estimated to be $$135,000,000$ 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 $$2,452\mathrm{.}5$ $$600$

Inventory $1,695705$

Equity method investments $----$

Investment in Saxon $1,471\mathrm{.}65--$

Land $487\mathrm{.}5225$

Buildings and equipment, net $2,700862\mathrm{.}5$

Current liabilities $(1,515)(900)$

Long$-$term debt $(3,750)(337\mathrm{.}5)$

Common stock, par value $(375)(75)$

Additional paid$-$in capital $(900)(262\mathrm{.}5)$

Retained earnings, January $1(1,957\mathrm{.}5)(633\mathrm{.}75)$

Dividends $37575$

Sales revenue $(22,500)(7,500)$

Equity in net income of Saxon $(174\mathrm{.}15)--$

Gain on sale of securities $--(7\mathrm{.}5)$

Gain on acquisition $(100)--$

Cost of goods sold $19,5006,000$

Depreciation expense $22530$

Interest expense $187\mathrm{.}518\mathrm{.}75$

Other operating expenses $2,077\mathrm{.}51,200$

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$)$ $$75$

Equity method investments $($sold in $2013)(37\mathrm{.}5)$

Land $183\mathrm{.}75$

Buildings and equipment, net $(20$ years, straight$-$line$)225$

Long$-$term debt $(5$ years, straight$-$line$)(82\mathrm{.}5)$

$($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

$1215$

Fair value of noncontrolling interest Answer

$135$

Answer

$1350$

Book value Answer

$971\mathrm{.}25$

Excess of fair value over book value:

Inventory Answer

$-75$

Equity method investments Answer

$37\mathrm{.}5$

Land Answer

$-183\mathrm{.}75$

Building and equipment Answer

$-225$

Long$-$term debt $($discount$)$ Answer

$82\mathrm{.}5$

Answer

$1500$

Gain on acquisition Answer

$150$

$($b$)$ Prepare a schedule calculating the equity in net income of Saxon for $2013,$ reported on Paxon's books, and the noncontrolling interest in income for $2013,$ to be reported on the consolidated income statement for $2013.$

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 $2013$ Answer

$258\mathrm{.}75$

Answer

$282\mathrm{.}875$

Answer

$25\mathrm{.}875$

Revaluation writeoffs

Inventory Answer

$-75$

Answer

$0$

Answer

$0$

Equity method investments Answer

$37\mathrm{.}5$

Answer

$0$

Answer

$0$

Buildings and equipment Answer

$-11\mathrm{.}25$

Answer

$0$

Answer

$0$

Long$-$term debt Answer

$-16\mathrm{.}5$

Answer

$0$

Answer

$0$

Answer

Answer

$0$

Answer

$0$

$($c$)$ Prepare a working paper to consolidate the trial balances of Paxon and Saxon at December $31,2013.$

Remember to use negative signs with your credit balance answers in the Consolidated Balance 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 $$2,452\mathrm{.}5$ $$600$ Answer

$0$

Inventory $1,695705($R$)$ Answer

$0$

Answer

$0$

$($O$-1)$ Answer

$0$

Equity method investments $--($O$-2)$ Answer

$0$

Answer

$0$

$($R$)$ Answer

$0$

Investment in Saxon $1,471\mathrm{.}65-$ Answer

$0$

$($C$)$ Answer

$0$

Answer

$0$

$($E$)$

Answer

$0$

$($R$)$

Land $487\mathrm{.}5225($R$)$ Answer

Answer

$0$

Buildings and equipment, net $2,700862\mathrm{.}5($R$)$ Answer

$0$

Answer

$0$

$($O$-3)$ Answer

$0$

Current liabilities $(1,515)(900)$ Answer

$0$

Long$-$term debt $(3,750)(337\mathrm{.}5)($R$)$ Answer

$0$

Answer

$0$

$($O$-4)$ Answer

$0$

Common stock $(375)(75)($E$)$ Answer

$0$

Answer

$0$

Additional paid$-$in capital $(900)(262\mathrm{.}5)($E$)$ Answer

$0$

Answer

$0$

Retained earnings, Jan. $1(1,957\mathrm{.}5)(633\mathrm{.}75)($E$)$ Answer

$0$

Answer

$0$

Noncontrolling interest Answer

$0$

$($E$)$ Answer

$0$

Answer

$0$

$($R$)$

Answer

$0$

$($N$)$

Dividends $37575$ Answer

$0$

$($C$)$ Answer

$0$

Answer

$0$

$($N$)$

Sales revenue $(22,500)(7,500)$ Answer

$0$

Equity in net income of Saxon $(174\mathrm{.}15)-($C$)$ Answer

$0$

Answer

$0$

Gain on acquisition $(100)$ Answer

$0$

Gain on sale of securities $-(7\mathrm{.}5)$ Answer

$0$

$($O$-2)$ Answer

$0$

Cost of goods sold $19,5006,000($O$-1)$ Answer

$0$

Answer

$0$

Depreciation expense $22530($O$-3)$ Answer

$0$

Answer

$0$

Interest expense $187\mathrm{.}518\mathrm{.}75($O$-4)$ Answer

$0$

Answer

$0$

Other operating expenses $2,077\mathrm{.}51,200$ Answer

$0$

Noncontrolling interest in NI $--($N$)$ Answer

$0$

$-$ Answer

$0$

$$0$ $$0$ Answer

$0$

Answer

$0$

Answer

$0$