On January 31, 2015, Paju Inc. (Paju) purchased 100 percent of the common shares of Shellmouth Ltd. (Shellmouth) for \($6,250,000\) in cash. Paju’s and Shellmouth’s balance sheets on January 31, 2015, just before the purchase are shown:

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

Required:

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

b. Calculate the amount of goodwill to be reported on Paju’s consolidated balance sheet on January 31, 2015.

c. Prepare Paju’s consolidated balance sheet on January 31,2015:

d. Calculate the current ratios and debt-to-equity ratios for Paju, Shellmouth, and for the consolidated balance sheet on January 31, 2015. Interpret the differences between the ratios. When calculating the ratios, use Paju’s and Shellmouth’s balance sheets after the purchase has been made and recorded.

e. You are a potential investor who has been asked to purchase a 25 percent equity interest in Shellmouth (you would purchase the shares from Shellmouth, not from Paju). Which balance sheets would you be interested in viewing? Explain. How would you use Paju’s consolidated financial statements in making your investment decision? What concerns would you have about making an equity investment in Shellmouth?

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Balance Sheets as of January 31, 2015 Paju Inc. Shellmouth Ltd. Current assets Capital assets Total assets Current liabilities Non-current liabilities $ 7,500,000 $5,625,000 14,687,500 1,875,000 $22,187,500 $7,500,000 $1,500,000 $1,875,000 7,500,000 625,000 Capital stock 9,375,000 3,750,000 Retained earnings 3,812,500 1,250,000 Total liabilities and shareholders' equity $22,187,500 $7,500,000