On January 1, Jarel acquired 80 percent of the outstanding voting stock of Suarez for $260,000 cash consideration. The remaining 20 percent of Suarez had an acquisition-date fair value of $65,000. On January 1, Suarez possessed equipment (5-year remaining life) that was undervalued on its books by $25,000. Suarez also had developed several secret formulas that Jarel assessed at $50,000. These formulas, although not recorded on Suarez’s financial records, were estimated to have a 20-year future life. As of December 31, the financial statements appeared as follows:

During the year, Jarel bought inventory for $80,000 and sold it to Suarez for $100,000. Of these goods, Suarez still owns 60 percent on December 31.

Jarel Suarez $ (300,000) 140,000 20,000 $ (140,000) $ (300,000) (140,000) Revenues Cost of goods sold. Expenses .. S(200,000) 80,000 10,000 S(110,000) Net income Retained earnings, 1/1. Net income S(150,000) (110,000) -0- Dividends declared. -0- $ (440,000) $ 210,000 150,000 260,000 440,000 $ 1,060,000 $ (420,000) (200,000) (440,000) S(1,060,000) Retained earnings, 12/31 S(260,000) $ 90,000 110,000 Cash and receivables . Inventory. .. Investment in Suarez Equipment (net). -0- 300,000 $ 500,000 Total assets Liabilities S(140,000) (100,000) (260,000) Common stock Retained earnings, 12/31 Total liabilities and equities. $(500,000)