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 $3,240,000,000 cash. The fair value of the 10 percent noncontrolling interest in Saxon was estimated to be $360,000,000 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	$6,540	$1,600
Inventory	4,520	1,880
Equity method investments	--	--
Investment in Saxon	3,924.4	--
Land	1,300	600
Buildings and equipment, net	7,200	2,300
Current liabilities	(4,040)	(2,400)
Long-term debt	(10,000)	(900)
Common stock, par value	(1,000)	(200)
Additional paid-in capital	(2,400)	(700)
Retained earnings, January 1	(5,220)	(1,690)
Dividends	1,000	200
Sales revenue	(60,000)	(20,000)
Equity in net income of Saxon	(464.4)	--
Gain on sale of securities	--	(20)
Gain on acquisition	(100)	--
Cost of goods sold	52,000	16,000
Depreciation expense	600	80
Interest expense	500	50
Other operating expenses	5,540	3,200
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)	$200
Equity method investments (sold in 2013)	(100)
Land	490
Buildings and equipment, net (20 years, straight-line)	600
Long-term debt (5 years, straight-line)	(220)

(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. Do not round answers.

Enter answers in millions.

Calculation of gain on acquisition
Acquisition cost		$Answer
Fair value of noncontrolling interest		Answer
		Answer
Book value	$Answer
Excess of fair value over book value:
Inventory	Answer
Equity method investments	Answer
Land	Answer
Building and equipment	Answer
Long-term debt (discount)	Answer	Answer
Gain on acquisition		$Answer

(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	$Answer	$Answer
Revaluation writeoffs
Inventory	Answer	Answer	Answer
Equity method investments	Answer	Answer	Answer
Buildings and equipment	Answer	Answer	Answer
Long-term debt	Answer	Answer	Answer
	$Answer	$Answer	$Answer

(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 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	$6,540	$1,600					$Answer
Inventory	4,520	1,880	(R)	Answer	Answer	(O-1)	Answer
Equity method investments	-	-	(O-2)	Answer	Answer	(R)	Answer
Investment in Saxon	3,924.4	-			Answer	(C)	Answer
					Answer	(E)
					Answer	(R)
Land	1,300	600	(R)	Answer			Answer
Buildings and equipment, net	7,200	2,300	(R)	Answer	Answer	(O-3)	Answer
Current liabilities	(4,040)	(2,400)					Answer
Long-term debt	(10,000)	(900)	(R)	Answer	Answer	(O-4)	Answer
Common stock	(1,000)	(200)	(E)	Answer			Answer
Additional paid-in capital	(2,400)	(700)	(E)	Answer			Answer
Retained earnings, Jan. 1	(5,220)	(1,690)	(E)	Answer			Answer
Noncontrolling interest	-	-			Answer	(E)	Answer
					Answer	(R)
					Answer	(N)
Dividends	1,000	200			Answer	(C)	Answer
					Answer	(N)
Sales revenue	(60,000)	(20,000)					Answer
Equity in net income of Saxon	(464.4)	-	(C)	Answer			Answer
Gain on acquisition	(100)						Answer
Gain on sale of securities	-	(20)			Answer	(O-2)	Answer
Cost of goods sold	52,000	16,000	(O-1)	Answer			Answer
Depreciation expense	600	80	(O-3)	Answer			Answer
Interest expense	500	50	(O-4)	Answer			Answer
Other operating expenses	5,540	3,200					Answer
Noncontrolling interest in NI	-	-	(N)	Answer	-		Answer
	$0	$0		$Answer	$Answer		$Answer