Question

P4.5 Consolidated Balance Sheet Working Paper, Bargain Purchase (see related P3.4) On anuary 1, 2019, Paxon Corporation acquired all of the outstanding common stock of Saxon Company for $1.7 billion cash. Paxon uses the complete equity method to report its investment. The trial balances of Paxon and Saxon at December 31, 2019, are shown below Dr (Cr) in millions) Paxon Saxon S 3,200 2,260 S 800 In 2,158 650 3,600 (2,020) (5,000) (500) (1,200) (2,410) 500 (30,000) (458) 300 1,150 (1,200) (450) (100) (350) (845) 100 (10,000) Current liabilities. Additional paid-in capital. . . Equity in net income of Saxon . . . .. .. . . . . . . . . . . (10) (100) 26,000 300 250 2,770 Cost of goods sold.... 8,000 40 25 1,600 Interest expense. Several of Saxon's assets had fair values different from their book values at the acquisition date, as follows In milllons) Falr value - Book value Inventory (FIFO) (sold in 2019) .. Equity method investments (sold in 2019) Land.... Buildings and equipment, net (20 years, straight-line). $(100) (50) 245 300 In addition, Saxon had previously unrecorded identifiable intangible assets valued at $110 million, with a 5-year life, straight-line Required a. Prepare a schedule to compute equity in net income of Saxon for 2019, and the December 31,2019 balance for Investment in Saxon, as reported on Paxon's books. Use a working paper to consolidate the trial balances of Paxon and Saxon at December 31,2019 Prepare the consolidated balance sheet at December 31, 2019, and the consolidated income state- ment for 2019 b. c.

Answer 1

Part A

Equity in net income for 2019:

Saxon’s reported net income for 2019 (10,000 + 10 – 8,000 – 40 – 25 – 1,600)	345
Revaluation write-offs:
Inventory	(100)
Marketable securities	50
Buildings and equipment ($300/20)	(15)
Long-term debt ($110/5)	(22)
Equity in net income of Saxon	258

Investment balance, December 31, 2019:

Investment balance, December 31, 2018	2000
Equity in net income for 2019	258
Dividends for 2019	(100)
Investment balance, December 31, 2019	2158

Calculation of gain on acquisition:

Acquisition cost		1800
Book value (100 + 350 + 845)		(1295)
Excess of acquisition cost over book value		505
Excess of fair value over book value:
Inventory	100
Marketable securities	(50)
Land	245
Buildings and equipment	300
Long-term debt (discount)	110	705
Gain on acquisition		200

Investment in Saxon	2000
Cash		1800
Gain on acquisition		200

Part B

	Paxon	Saxon	Elimination		Consolidated balances
			Debit	Credit
Cash and receivables	3100	800			3900
Inventory	2260	940	100	100	3200
Marketable securities	-	-	50	50	-
Investment in Saxon	2158	-	-	2158
Land	650	300	245		1195
Buildings and equipment, net	3600	1150	300	15	5035
Current liabilities	(2020)	(1200)			(3220)
Long-term debt	(5000)	(450)	110	22	(5362)
Common stock	(500)	(100)	100		(500)
Additional paid-in capital	(1200)	(350)	350		(1200)
Retained earnings, Jan. 1	(2610)	(845)	845		(2610)
Dividends	500	100		100	500
Sales revenue	(30000)	(10000)			(40000)
Equity in income of Saxon	(258)		258
Gain on sale of securities		(10)		50	(60)
Cost of goods sold	26000	8000	100		34100
Depreciation expense	300	40	15		355
Interest expense	250	25	22		297
Other operating expenses	2770	1600			4370
	0	0	2495	2495	0

Part C

Consolidated Statement of Income and Retained Earnings For the Year 2019

Sales		40000
Costs of goods sold		(34100)
Gross margin		5900
Operating expenses:
Depreciation expense	355
Interest expense	297
Other operating expenses	4370	(5022)
Income before other gains		878
Gain on sale of securities		60
Net income		938
Retained earnings, January 1		2610
Dividends		(500)
Retained earnings, December 31		3048

Consolidated Balance Sheet, December 31, 2019

Assets
Cash and receivables	3900
Inventory	3200
Land	1195
Buildings and equipment, net	5035
Total assets	13330
Liabilities and stockholders’ equity
Current liabilities	3220
Long-term debt	5362
Common stock	500
Additional paid-in capital	1200
Retained earnings	3048
Total liabilities and stockholders’ equity	13330