On January 1, Year 4, Grant Corporation bought 10,000 (80%) of the outstanding common shares of Lee Company for $87,500 cash. Lee's shares were trading for $7 per share on the date of acquisition. On that date, Lee had $31,250 of common shares outstanding and $37,500 retained earnings. Also on that date, the carrying amount of each of Lee's identifiable assets and liabilities was equal to Its fair value except for the following: Inventory Patent Carrying Amount $62,500 12,500 Fair Value $68,750 25,000 The patent had an estimated useful life of five years at January 1, Year 4, and the entire inventory was sold during Year 4. Grant uses the cost method to account for its investment. The following are the separate-entity financial statements of Grant and Lee as at December 31, Year 7: Assets Cash Accounts receivable Inventory Investment in Lee BALANCE SHEETS At December 31, Year 7 Grant Lee $ 6,250 231,250 $ 22,500 102,500 387,500 125,000 87,500 287,500 256,250 2,500 Equipment, net Patent, net Liabilities and Shareholders' Equity Accounts payable Other accrued liabilities Income taxes payable Common shares Retained earnings $1,000,000 $508,750 $ 237,500 $243,750 75,000 62,500 100,000 90,000 212,500 31,250 375,000 81,250 $1,000,000 $508,750