Consolidation Working Paper One Year after Acquisition, Bargain Purchase 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 (in millions) Cash and receivables Inventory Equity method investments Investment in Saxon Dr(Cr) Paxon Saxon $3,225 $855 2,260 530 December 31, 2022, appear below: 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) (500) (50) Common stock, par value Additional paid-in capital Retained earnings, January 1 Dividends Sales revenue (1,200) (200) (2,410) (600) 500 250 (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 Interest expense Depreciation and amortization expense Other operating expenses 300 40 250 2,770 3,000 Total $0 Several of Saxon's 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) Equity method investments(sold in 2022) Land Buildings and equipment, net (20 years, straight-line) $(400) 100 275 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 Fair value of noncontrolling interest Book value Revaluations: $ Inventory Equity method investments Land Building and equipment Identifiable intangibles Gain on acquisition (b) Prepare a schedule calculating the equity in net income of Saxon for 2022, reported on Paxon's 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) Saxon's reported net income for 2022 $ Revaluation write-offs Inventory Equity method investments Buildings and equipment Identifiable intangibles Equity in Noncontrolling Total NI interest in NI 05 0 0 0 0 0 0 0 0 0 0 0 0 0 $ 05 0 (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 Paxon Saxon (in millions) Cash and receivables Dr (Cr) Dr (Cr) $3,225 Debit Credit $855 Inventory 2,260 530 (0-1) Equity method investments (R) 0 Identifiable intangible assets Investment in Saxon (R) 2,441.5 Consolidated Balances Dr (Cr) $ 0(R) 0 (0-2) 0 (0-4) 0 0 (C) 0 0 (C) 0 (R) Land 650 300 (R) Buildings and equipment, net 3,600 1,150 (R) 0 (0-3) Current liabilities (2,020) (1,200) 0 Long-term debt (5,000) (450) 0 Common stock (500) (50) (E) Additional paid-in capital (1,200) (200) (E) Retained earnings, Jan. 1 (2,410) (600) (E) OOO 0 ° 0 ° 0 ° Noncontrolling interest 0(E) 0 0 (R) Dividends 500 250 0(N) 0 (C) 0 0(N) Sales revenue (30,000) (12,000) Equity in net income of Saxon (616.5) (C) 0 Gain on acquisition (250) aaa Gain on sale of securities Cost of goods sold 26,000 (150) (0-2) 8,500 0 (0-1) Depreciation and amortization expense 300 40 (0-3) 0 (0-4) 0 Interest expense 250 25 Other operating expenses 2,770 3,000 Noncontrolling interest in NI (N) 0 ° Total $0 19 $ 0 $ 0 $ 0

Consolidation Working Paper One Year after Acquisition, Bargain Purchase 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 (in millions) Cash and receivables Inventory Equity method investments Investment in Saxon Dr(Cr) Paxon Saxon $3,225 $855 2,260 530 December 31, 2022, appear below: 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) (500) (50) Common stock, par value Additional paid-in capital Retained earnings, January 1 Dividends Sales revenue (1,200) (200) (2,410) (600) 500 250 (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 Interest expense Depreciation and amortization expense Other operating expenses 300 40 250 2,770 3,000 Total $0 Several of Saxon's 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) Equity method investments(sold in 2022) Land Buildings and equipment, net (20 years, straight-line) $(400) 100 275 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 Fair value of noncontrolling interest Book value Revaluations: $ Inventory Equity method investments Land Building and equipment Identifiable intangibles Gain on acquisition (b) Prepare a schedule calculating the equity in net income of Saxon for 2022, reported on Paxon's 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) Saxon's reported net income for 2022 $ Revaluation write-offs Inventory Equity method investments Buildings and equipment Identifiable intangibles Equity in Noncontrolling Total NI interest in NI 05 0 0 0 0 0 0 0 0 0 0 0 0 0 $ 05 0 (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 Paxon Saxon (in millions) Cash and receivables Dr (Cr) Dr (Cr) $3,225 Debit Credit $855 Inventory 2,260 530 (0-1) Equity method investments (R) 0 Identifiable intangible assets Investment in Saxon (R) 2,441.5 Consolidated Balances Dr (Cr) $ 0(R) 0 (0-2) 0 (0-4) 0 0 (C) 0 0 (C) 0 (R) Land 650 300 (R) Buildings and equipment, net 3,600 1,150 (R) 0 (0-3) Current liabilities (2,020) (1,200) 0 Long-term debt (5,000) (450) 0 Common stock (500) (50) (E) Additional paid-in capital (1,200) (200) (E) Retained earnings, Jan. 1 (2,410) (600) (E) OOO 0 ° 0 ° 0 ° Noncontrolling interest 0(E) 0 0 (R) Dividends 500 250 0(N) 0 (C) 0 0(N) Sales revenue (30,000) (12,000) Equity in net income of Saxon (616.5) (C) 0 Gain on acquisition (250) aaa Gain on sale of securities Cost of goods sold 26,000 (150) (0-2) 8,500 0 (0-1) Depreciation and amortization expense 300 40 (0-3) 0 (0-4) 0 Interest expense 250 25 Other operating expenses 2,770 3,000 Noncontrolling interest in NI (N) 0 ° Total $0 19 $ 0 $ 0 $ 0

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter8: Investing Activities

Section: Chapter Questions

Problem 22PC

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