On 1 January 20X4, Plastik acquired 80 per cent of the equity share capital of Subtrak. The consideration was satisfied by a share exchange of two shares in Plastik for every three acquired shares in Subtrak. At the date of acquisition, shares in Plastik and Subtrak had a market value of $3 and $2.50 each, respectively. Plastik will also pay cash consideration of 27.5 cents on 1 January 20X5 for each acquired share in Subtrak. Plastik has a cost of capital of 10 per cent per annum. None of the consideration has been recorded by Plastik. Below are the summarized draft financial statements of both companies.

The following information is relevant:

(i) At the date of acquisition, the fair values of Subtrak’s assets and liabilities were equal to their carrying amounts with the exception of Subtrak’s property, which had a fair value of $4 million above its carrying amount. For consolidation purposes, this led to an increase in depreciation charges (in cost of sales) of $100,000 in the post-acquisition period to 30 September 20X4. Subtrak has not incorporated the fair value property increase into its entity financial statements. The policy of the Plastik group is to revalue all properties to fair value at each year end. On 30 September 20X4, the increase in Plastik’s property has already been recorded; however, a further increase of $600,000 in the value of Subtrak’s property since its value at acquisition and 30 September 20X4 has not been recorded.

(ii) On 30 September 20X4, Plastik accepted a $1 million 10 per cent loan note from Subtrak.

(iii) Sales from Plastik to Subtrak throughout the year ended 30 September 20X4 had consistently been $300,000 per month. Plastik made a mark-up on cost of 25 per cent on all these sales. $600,000 (at cost to Subtrak) of Subtrak’s inventory at 30 September 20X4 had been supplied by Plastik in the post-acquisition period.

(iv) Plastik had a trade receivable balance owing from Subtrak of $1.2 million as at 30 September 20X4. This differed to the equivalent trade payable of Subtrak due to a payment by Subtrak of $400,000 made in September 20X4 which did not clear Plastik’s bank account until 4 October 20X4. Plastik’s policy for cash timing differences is to adjust the parent’s financial statements.

(v) Plastik’s policy is to value the non-controlling interest at fair value at the date of acquisition. For this purpose, Subtrak’s share price at that date can be deemed to be representative of the fair value of the shares held by the non-controlling interest.

(vi) Due to recent adverse publicity concerning one of Subtrak’s major product lines, the goodwill which arose on the acquisition of Subtrak has been impaired by $500,000 as at 30 September 20X4. Goodwill impairment should be treated as an administrative expense.

(vii) Assume, except where indicated otherwise, that all items of income and expenditure accrue evenly throughout the year.

Required: 

(a) Prepare the consolidated statement of profit or loss and other comprehensive income for Plastik for the year ended 30 September 20X4.

(b) Prepare the consolidated statement of financial position for Plastik as at 30 September 20X4.

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Statements of profit or loss and other comprehensive income for the year ended 30 September 20X4 Revenue Cost of sales Gross profit Distribution costs Administrative expenses Finance costs Profit before tax Income tax expense Profit for the year Other comprehensive income: Gain on revaluation of property (Note (i)) Total comprehensive income Assets Non-current assets Property, plant and equipment Investments: 10% loan note from Subtrak (Note (ii)) Current assets Inventories (Note (iii)) Receivables (Note (iv)) Bank Total assets Equity and liabilities Equity Equity shares of $1 each Statements of financial position as at 30 September 20X4 Plastik $000 Revaluation surplus (Note (i)) Retained earnings Non-current liabilities 10% loan notes (Note (ii)) Current liabilities Plastik $000 Trade payables (Note (iv)) Bank Current tax payable Total equity and liabilities 62,600 (45,800) 16,800 (2,000) (3,500) (200) 11,100 (3,100) 8,000 1,500 9,500 18,700 1,000 19,700 4,300 4,700 9,000 28,700 10,000 2,000 6,300 18,300 2,500 3,400 1,700 2,800 7,900 28,700 Subtrak $000 30,000 (24,000) 6,000 (1,200) (1,800) 3,000 (1,000) 2,000 2,000 Subtrak $000 13,900 13,900 1,200 2,500 300 4,000 17,900 9,000 3,500 12,500 1,000 3,600 800 4,400 17,900