On August 31, 2014, Pacquet Inc. (Pacquet) purchased 100 percent of the common shares of Schwitzer Ltd. (Schwitzer) for \($2,000,000\) cash. Pacquet’s and Schwitzer’s balance sheets on August 31, 2014 just before the purchase are shown:

Management determined that the fair values of Schwitzer’s assets and liabilities were as follows:

Required:

a. Prepare Pacquet’s balance sheet immediately following the purchase.

b. Calculate the amount of goodwill that would be reported on Pacquet’s consolidated balance sheet on August 31, 2014.

c. Prepare Pacquet’s consolidated balance sheet on August 31, 2014.

d. Calculate the current ratios and debt-to-equity ratios for Pacquet, Schwitzer, and for the consolidated balance sheet on August 31, 2014. Interpret the differences between the ratios. When calculating the ratios, use Pacquet and Schwitzer’s balance sheets after the purchase had been made and recorded.

e. You are a lender who has been asked to make a sizeable loan to Schwitzer. Which balance sheets would you be interested in viewing? Explain. How would you use Pacquet’s consolidated financial statements in making your lending decision?

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Current assets Capital assets Total assets 3,250,000 $6,750,000 Balance Sheets as of August 31, 2014 Pacquet Inc. $3,500,000 Schwitzer Ltd. $ 625,000 1,250,000 $1,875,000 Current liabilities $1,350,000 $ 375,000 Non-current liabilities 1,250,000 500,000 Capital stock 2,000,000 250,000 Retained earnings 2,150,000 750,000 Total liabilities and shareholders' equity $6,750,000 $1,875,000