On August 31, 2017, 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, 2017 just before the purchase are as shown in the following table.

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

Fair value of Schwitzer’s identifiable assets and liabilities on August 31, 2017

Current assets.......................$ 875,000

Capital assets.........................1,950,000

Current liabilities......................375,000

Non-current liabilities..............550,000

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, 2017.

c. Prepare Pacquet’s consolidated balance sheet on August 31, 2017.

d. Calculate the current ratios and debt-to-equity ratios for Pacquet, Schwitzer, and for the consolidated balance sheet on August 31, 2017. 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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Balance Sheets as of August 31, 2017 Pacquet Inc. Schwitzer Ltd. Current assets $3,500,000 S 625,000 Capital assets 3,250,000 1,250,000 Total assets $6,750,000 S1,875,000 Current liabilities $1,350,000 S 375,000 Non-current liabilities 1,250,000 500,000 Common shares 2,000,000 250,000 Retained earnings 2,150,000 750,000 Total liabilities and shareholders' equity $6,750,000 S1,875,000