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On December 31, 2012, Paxon Corporation acquired all of the outstanding common stock of Saxon Company for $0.9 billion cash. Paxon uses the complete equity

On December 31, 2012, Paxon Corporation acquired all of the outstanding common stock of Saxon Company for $0.9 billion cash. Paxon uses the complete equity method to report its investment. The trial balances of Paxon and Saxon at December 31, 2013, are shown below:

Dr(Cr)
(in millions)PaxonSaxon
Cash and receivables$1,550$400
Inventory1,130470
Equity method investments----
Investment in Saxon1,078--
Land325150
Buildings and equipment (net)1,800575
Current liabilities(1,010)(600)
Long-term debt(2,500)(225)
Common stock, par value(250)(50)
Additional paid-in capital(600)(175)
Retained earnings, January 1(1,205)(423)
Dividends25050
Sales revenue(15,000)(5,000)
Equity in net income of Saxon(128)--
Gain on sale of securities--(5)
Gain on acquisition(100)--
Cost of goods sold13,0004,000
Depreciation expense15020
Interest expense12513
Other operating expenses1,385800
Totals$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)$50
Equity method investments (sold in 2013)(25)
Land122
Buildings and equipment, net (20 years, straight-line)150
Long-term debt (5 years, straight-line)(55)

(a) Prepare a schedule to compute equity in net income of Saxon for 2013, and the December 31, 2013, balance for the Investment in Saxon, as reported on Paxon's books.

Instructions:

Enter all answers in millions. Round all answers to the nearest million, when appropriate.

Use negative signs with answers that reduce equity in net income and the investment account balance.

Calculation of Equity in Net Income for 2013
(in millions)
Saxon's reported net income for 2013$Answer
Revaluation writeoffs:
InventoryAnswer
Equity method investmentsAnswer
Buildings and equipmentAnswer
Long-term debtAnswer
Equity in net income of Saxon$Answer
Calculation of Investment Balance, December 31, 2013
(in millions)
Investment balance, December 31, 2012$Answer
Equity in net income for 2013Answer
Dividends for 2013Answer
Investment balance, December 31, 2013$Answer

(b) Use 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.

Consolidation Working Paper
Accounts Taken From BooksEliminations
(in millions)Paxon
Dr (Cr)
Saxon
Dr (Cr)
DebitCreditConsolidated Balances
Dr (Cr)
Cash and receivables$1,550$400$Answer
Inventory1,130470(R)AnswerAnswer(O-1)Answer
Equity method investments--(O-2)AnswerAnswer(R)Answer
Investment in Saxon1,078-Answer(C)Answer
Answer(E)
Answer(R)
Land325150(R)AnswerAnswer
Buildings and equipment, net1,800575(R)AnswerAnswer(O-3)Answer
Current liabilities(1,010)(600)Answer
Long-term debt(2,500)(225)(R)AnswerAnswer(O-4)Answer
Common stock(250)(50)(E)AnswerAnswer
Additional paid-in capital(600)(175)(E)AnswerAnswer
Retained earnings, Jan. 1(1,205)(423)(E)AnswerAnswer
Dividends25050Answer(C)Answer
Sales revenue(15,000)(5,000)Answer
Equity in net income of Saxon(128)-(C)AnswerAnswer
Gain on sale of securities-(5)Answer(O-2)Answer
Gain on acquisition(100)Answer
Cost of goods sold13,0004,000(O-1)AnswerAnswer
Depreciation expense15020(O-3)AnswerAnswer
Interest expense12513(O-4)AnswerAnswer
Other operating expenses1,385800--Answer
Total$0$0$Answer$Answer$Answer

(c) Prepare the consolidated balance sheet and statement of income and retained earnings at December 31, 2013.

INSTRUCTIONS: Do not use negative signs with any of your answers below for the balance sheet and income statement.

Consolidated Income Statement
Year Ended December 31,2013
(in millions)
Sales$Answer
Cost of goods soldAnswer
Gross marginAnswer
Operating expenses:
Depreciation expense$Answer
Interest expenseAnswer
Other operating expensesAnswerAnswer
Income before other gainsAnswer
Gain on sale of securitiesAnswer
Gain on acquisitionAnswer
Net income$Answer

  HINT: The answer for Retained Earnings is $1,523.

Consolidated Balance Sheet

December 31, 2013

(in millions)
Assets
Cash and receivables$Answer
InventoryAnswer
LandAnswer
Buildings and equipment, netAnswer
Total assets$Answer
Liabilities and Stockholders' Equity
Current liabilities$Answer
Long-term debtAnswer
Common stockAnswer
Additional paid-in capitalAnswer
Retained earningsAnswer
Total liabilities and stockholders' equity$Answer

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