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):

Â	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	Â
Retained earnings	80	Â
Total equities	$400	Â

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?