On January 1, 2018, Paul Company purchased 80% of the common stock of Smith Company for $300,000. On this date Smith had total owners' equity of $350,000. Any excess of cost over book value is attributed to a patent, to be amortized over 10 years.

During 2018, Paul has accounted for its investment in Smith using the simple equity method.

During 2018, Paul sold merchandise to Smith for $50,000, of which $10,000 is held by Smith on December 31, 2018. Paul's gross profit on sales is 40%.

During 2018, Smith sold some land to Paul at a gain of $10,000. Paul still holds the land at year end.

Paul and Smith qualify as an affiliated group for tax purposes and thus will file a consolidated tax return. Assume a 30% corporate income tax rate.

Required:

• Prepare the formal financial statements (Income Statement and Balance Sheet) at December 31, 2018.