What is Pay’s income from Sap for 2012?


Question Description:

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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?

Answer

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