Question

Consolidated Balance Sheet Working Paper, Bargain PurchaseOn January 1, 2016, Paxon Corporation acquired all of the outstanding common stock of Saxon Company for $1.8 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
Long-term 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	(2,410)	(845)
Dividends	500	100
Sales revenue	(30,000)	(10,000)
Equity in net income of Saxon	(258)	--
Gain on sale of securities	--	(10)
Gain on acquisition	(200)	--
Cost of goods sold	26,000	8,000
Depreciation expense	300	40
Interest expense	250	25
Other operating expenses	2,770	1,600
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)	$100
Long-term investments (sold in 2016)	(50)
Land	245
Buildings and equipment, net (20 years, straight-line)	300
Long-term debt (overvalued), (5 years, straight-line)	(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.

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.

Calculation of Equity in Net Income for 2016 (in millions)
Saxon's reported net income for 2016	$Answer
Revaluation write-offs:
Inventory	Answer
Long-term investments	Answer
Buildings and equipment	Answer
Long-term debt	Answer
Equity in net income of Saxon	$Answer

Calculation of investment balance for December 31, 2016 (in millions).

1. Calculate gain on acquisition

When appropriate, use negative signs with your excess of fair value over book value answers (left column only). Do not use negative signs with your answers in the right column.

Acquisition cost		$Answer
Book value		Answer
Excess of acquisition cost over book value		Answer
Excess of fair value over book value:
Inventory	$Answer
Long term investments	Answer
Land	Answer
Buildings and equipment	Answer
Long-term debt (discount)	Answer	Answer
Gain on acquisition		$Answer

2. Prepare the journal entry made by Paxon to record the acquisition (in millions).

General Journal
Description	Debit	Credit
AnswerInvestment in SaxonGain on acquisitionGoodwillEquity in net income for Saxon	Answer	Answer
Cash	Answer	Answer
AnswerInvestment in SaxonGain on acquisitionGoodwillEquity in net income for Saxon	Answer	Answer

Use negative signs with answers that reduce the investment balance.

Calculation of Investment Balance, December 31, 2016
(in millions)
Investment balance, January 1, 2016	$Answer
Equity in net income for 2016	Answer
Dividends for 2016	Answer
Investment balance, December 31, 2016	$Answer

(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
(in millions)	Paxon Dr (Cr)	Saxon Dr (Cr)		Debit	Credit		Consolidated Balances Dr (Cr)
Cash and receivables	$3,100	$800					$Answer
Inventory	2,260	940	(R)	Answer	Answer	(O-1)	Answer
Long term investments	-	-	(O-2)	Answer	Answer	(R)	Answer
Investment in Saxon	2,158	-			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)	(R)	Answer	Answer	(O-4)	Answer
Common stock	(500)	(100)	(E)	Answer			Answer
Additional paid-in capital	(1,200)	(350)	(E)	Answer			Answer
Retained earnings, Jan. 1	(2,410)	(845)	(E)	Answer			Answer
Dividends	500	100			Answer	(C)	Answer
Sales revenue	(30,000)	(10,000)					Answer
Equity in net income of Saxon	(258)		(C)	Answer			Answer
Gain on sale of securities	-	(10)			Answer	(O-2)	Answer
Gain on acquisition	(200)	-					Answer
Cost of goods sold	26,000	8,000	(O-1)	Answer			Answer
Depreciation expense	300	40	(O-3)	Answer			Answer
Interest expense	250	25	(O-4)	Answer			Answer
Other operating expenses	2,770	1,600		-	-		Answer
Total	$0	$0		$Answer	$Answer		$Answer

(c) Prepare the consolidated balance sheet at December 31, 2016, and the consolidated income statement for 2016.

For all your answers below, do not use negative signs.

Consolidated Income Statement
Year Ended December 31,2016
(in millions)
Sales		$Answer
Cost of goods sold		Answer
Gross margin		Answer
Operating expenses:
Depreciation expense	$Answer
Interest expense	Answer
Other operating expenses	Answer	Answer
Income before other gains		Answer
Gain on sale of securities		Answer
Gain on acquisition		Answer
Net income		$Answer

Consolidated Balance Sheet December 31, 2016
(in millions)
Assets
Cash and receivables	$Answer
Inventory	Answer
Land	Answer
Buildings and equipment, net	Answer
Total assets	$Answer
Liabilities and Stockholders' Equity
Current liabilities	$Answer
Long-term debt	Answer
Common stock	Answer
Additional paid-in capital	Answer
Retained earnings	Answer
Total liabilities and stockholders' equity	$Answer

Answer 1

( C ) Prepare the consolidated balance sheet at December 31, 2016, and the consolidated income statement for 2016.