Consolidated Balance Sheet Working Paper, Bargain Purchase
On January 1, 2022. Paxon Corporation acquired all of the outstanding common stock of Saxon Company for $2 billion cash. Paxon uses the complete equity method to report its investment. The trial balances of Paxon and Saxon at December 31, 2022, are shown below:
| | Paxon (in millions) | Saxon (in millions) |
| :----------------------------------- | :------------------ | :------------------ |
| Cash and receivables | $3,050 | $855 |
| Inventory | 2,260 | 530 |
| Equity method investments | | |
| Investment in Saxon | 2,635 | |
| 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 | | (685) |
| Gain on sale of equity method investments | | (150) |
| Gain on acquisition | (200) | |
| 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 |
| Totals | | |
Several of Saxon's assets had fair values different from their book values at the acquisition date, as follows:
| | Fair Value less Book Value (in millions) |
| :----------------------------------- | :---------------------------------------- |
| 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 to compute equity in net income of Saxon for 2022, and the December 31, 2022 balance for Investment in Saxon, as reported on Paxon's books.
Instructions:
1. Enter all answers in millions. Round all answers to the nearest million, when appropriate.
2. Use negative signs with answers that reduce equity in net income and the investment account balance.
Calculation of Equity in Net Income for 2022
(in millions)
Saxon's reported net income for 2022
Revaluation write-offs:
Inventory
Equity method investments
Land
Buildings and equipment
Identifiable intangibles
Equity in net income of Saxon
Calculation of Investment Balance, December 31, 2022
(in millions)
Investment balance, January 1, 2022
Equity in net income for 2022
Dividends for 2022
Investment balance, December 31, 2022
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