Question
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
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 | ||
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