Question

Consolidation Working Paper One Year After Acquisition, Bargain Purchase (see re- lated P4.5) On January 1,...

Consolidation Working Paper One Year After Acquisition, Bargain Purchase (see re-

lated P4.5) On January 1, 2019, Paxon Corporation acquired 90 percent of the outstanding com‑

mon stock of Saxon Company for $1,520 million cash. The fair value of the 10 percent noncontrolling

interest in Saxon was estimated to be $180 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, 2019,

appear below:

(in millions)

Dr (Cr)

Paxon Saxon

Cash and receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,370 $ 800

Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,260 940

Equity method investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —

Investment in Saxon. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,942.2 —

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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (412.2) —

Gain on acquisition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (100) —

Gain on sale of securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (10)

Cost of goods sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,000 8,000

Depreciation and amortization expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300 40

Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250 25

Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,770

1,600

Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0 $ 0

Several of Saxon’s assets had fair values different from their book values at the acquisition date, as

follows:

(in millions) Fair value 2 Book value

Inventory (FIFO) (sold in 2019) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(100)

Equity method investments (sold in 2019) . . . . . . . . . . . . . . . . . . . . . . . . . . . (50)

Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245

Buildings and equipment, net (20 years, straight-line). . . . . . . . . . . . . . . . . . 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 computing the gain on acquisition.

b. Prepare a schedule calculating the equity in net income of Saxon for 2019, reported on Paxon’s

books, and the noncontrolling interest in net income for 2019, to be reported on the consolidated

income statement for 2019.

c. Prepare a working paper to consolidate the trial balances of Paxon and Saxon at December 31, 2019

Homework Answers

Answer #1

Answer:-

1.) Compute Gain on Acquisition as follows:-

Particulars Amount

Invesment in Saxon = 1520

Less:- Share Capital (500 * 90%) = (450)

Less:- Pre-Retained Earning ( 845 * 90% ) = (760.50)

Less:- Dividend of previous year( 100 * 90%) = (90.00)

Goodwill = 219.50

2.) Net Income:-

  Investment Value = 1942.20

Less:- Purchase acquisition = (1520.00)

Less:- Goodwill = ( 219.50)

Net Income = 202.70

Non Controlling Interest Value :- 1912.50 / 90 * 10 = 212.50

Less:- Share Capital (500 * 10%) = (50.00)

Less:- Pre-Retained Earning ( 845 * 10% ) = (84.50)

Net Income = 78.00

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