On January 1, 2016, Paxon Corporation acquired all of the outstanding common stock of Saxon Company for $1.9 billion cash. Paxon uses the complete equity method to report its investment. The trial balances of Paxon and Saxon at December 31, 2016, are shown below: Dr(Cr) (in millions) Paxon Saxon Cash and receivables $3,100 $800 Inventory 2,260 940 Equity method investments Investment in Saxon 2.158 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 Dividends (2.510) (845) 500 100 Sales revenue Equity in net income of Saxon (30.000) (10,000) (258) Gain on sale of equity method investments (10) Gain on acquisition (100) Cost of goods sold 26,000 8,000 Depreciation expense 300 40 Interest expense 250 25 Other operating expenses 2.770 1,600 Totals 50 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) Equity method investments(sold in 2016) Land $100 (50) 245 Buildings and equipment, net (20 years, straight-line) Long-term debt (overvalued), (5 years, straight-line) 300 (110) Required (a) Prepare a schedule to compute equity in net income of Saxon for 2016, and the December 31, 2016, balance for Investment in Saxon, as reported on Paxon's books. Instructions: 1. Enter all answers in millions. Round all answers to the nearest million, when appropriate. 2. Use negative signs with answers that reduce equity in net income and the investment account balance. Calculation of Equity in Net Income for 2016 (in millions) Saxon's reported net income for 2016 $ 0 Revaluation write-offs: Inventory 0 Equity method investments 0 Buildings and equipment 0 Long-term debt 0 Equity in net income of Saxon $ 0 Calculation of Investment Balance, December 31, 2016 (in millions) Investment balance, January 1, 2016 S 0 Equity in net income for 2016 0 Dividends for 2016 0 Investment balance. December 31, 2016 S o (b) Use a working paper to consolidate the trial balances of Paxon and Saxon at December 31, 2016. Remember to use negative signs with your credit balance answers in the Consolidated Balances column. Consolidation Working Paper Accounts Taken From Books Eliminations Saxon (in millions) Dr (Cr) Dr (Cr) Debit Credit Consolidated Balances Dr (Cr) Cash and receivables $3,100 $800 $ Inventory 2,260 940 (R) 0 0 (0-1) Equity method investments (0-2) 0 0 (R) Investment in Saxon 2,158 0 (C) 0 0 0 0 (E) 0 (R) Land 650 300 (R) 0 0 Buildings and equipment, net 3,600 1,150 (R) 0 0 (0-3) 0 Current liabilities (2,020) (1,200) 0 Long-term debt (5,000) (450) (R) 0 0 (0-4) 0 Common stock (500) (100) (E) 0 0 Additional paid-in capital (1,200) (350) (E) 0 0 Retained earnings, Jan. 1 (2.510) (845) (E) 0 0 Dividends 500 100 0 (C) 0 Sales revenue (30,000) (10,000) Equity in net income of Saxon (258) (C) 0 0 Gain on sale of equity method investments (10) 0 (0-2) 0 Gain on acquisition (100) 0 Cost of goods sold 26,000 8.000 (0-1) 0 Depreciation expense 300 40 (0-5) O 0 Interest expense 250 25 (0-4) Other operating expenses 2,770 1,600 Total 50 50 (c) Prepare the consolidated balance sheet at December 31, 2016, and the consolidated income statement for 2016. INSTRUCTIONS: Do not use negative signs with any of your answers below for the balance sheet and income statement. Sales Cost of goods sold Gross margin Consolidated Income Statement Year Ended December 31,2016 Operating expenses Depreciation expense Interest expense Other operating expenses Income before other gains (in millions) Gain on sale of equity method investments Gain on acquisition Net income $ 0 0 0 0 0 0 0 0 0 0 0 HINT: The answer for Retained Earnings is $3,048. Consolidated Balance Sheet December 31, 2016 (in millions) Assets Cash and receivables Inventory Land Buildings and equipment, net Total assets Liabilities and Stockholders' Equity Current liabilities Long-term debt $ 0 0 0 0 $ 0 S 0 0 Common stock Additional paid-in capital Retained earnings 0 0 0 Total liabilities and stockholders' equity S 0