Journal entry to record push down, subsidiary balance sheet, and investment income
Pay Corporation paid $480,000 cash for a 100 percent interest in Sap Corporation on January 1, 2012, when Sap’s stockholders’ equity consisted of $200,000 capital stock and $80,000 retained earnings. Sap’s balance sheet on December 31, 2011, is summarized as follows (in thousands):
|
Book Value |
Fair Value |
|
|
Cash |
$ 30 |
$ 30 |
|
Accounts receivable—net |
70 |
70 |
|
Inventories |
60 |
80 |
|
Land |
50 |
75 |
|
Buildings—net |
100 |
190 |
|
Equipment—net |
90 |
75 |
|
Total assets |
$400 |
$520 |
|
Accounts payable |
$ 50 |
$ 50 |
|
Other liabilities |
70 |
$ 60 |
|
Capital stock |
200 |
|
|
Retained earnings |
80 |
|
|
Total equities |
$400 |
Pay uses the equity method to account for its interest in Sap. The amortization periods for the fair value/book value differentials at the time of acquisition were as follows:
|
$20,000 |
Undervalued inventories (sold in 2012) |
|
25,000 |
Undervalued land |
|
90,000 |
Undervalued buildings (10 year useful life remaining) |
|
(15,000) |
Overvalued equipment (5 year useful life remaining) |
|
10,000 |
Other liabilities (2 years before maturity) |
|
70,000 |
Goodwill |
REQUIRED
1. Prepare a journal entry on Sap’s books to push down the values reflected in the purchase price.
2. Prepare a balance sheet for Sap Corporation on January 1, 2012.
3. Sap’s net income for 2012 under the new push down accounting system is $90,000. What is Pay’s income from Sap for 2012?