On 1 April 20X3 Polestar acquired 75 per cent of the equity share capital of Southstar. Southstar had been experiencing difficult trading conditions and making significant losses. In allowing for Southstar’s difficulties, Polestar made an immediate cash payment of only $1.50 per share. In addition, Polestar will pay a further amount in cash on 30 September 20X4 if Southstar returns to profitability by that date. The value of this contingent consideration at the date of acquisition was estimated to be $1.8 million, but at 30 September 20X3, in the light of continuing losses, its value was estimated at only $1.5 million. The contingent consideration has not been recorded by Polestar. Overall, the directors of Polestar expect the acquisition to be a bargain purchase leading to negative goodwill. At the date of acquisition, shares in Southstar had a listed market price of $1.20 each. 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 Southstar’s assets were equal to their carrying amounts with the exception of a leased property. This had a fair value of $2 million above its carrying amount and a remaining lease term of ten years at that date. All depreciation is included in cost of sales.

(ii) Polestar transferred raw materials at their cost of $4 million to Southstar in June 20X3. Southstar processed all of these materials incurring additional direct costs of $1.4 million and sold them back to Polestar in August 20X3 for $9 million. At 30 September 20X3, Polestar had $1.5 million of these goods still in inventory. There were no other intra-group sales.

(iii) Polestar has recorded its investment in Southstar at the cost of the immediate cash payment; other equity investments are carried at fair value through profit or loss as at 1 October 20X2. The other equity investments have fallen in value by $200,000 during the year ended 30 September 20X3.

(iv) Polestar’s policy is to value the non-controlling interest at fair value at the date of acquisition. For this purpose, Southstar’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.

(v) All items in the above statements of profit or loss are deemed to accrue evenly over the year unless otherwise indicated.

Required: 

(a) Prepare the consolidated statement of profit or loss for Polestar for the year ended 30 September 20X3.

(b) Prepare the consolidated statement of financial position for Polestar as at 30 September 20X3.

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Statements of profit or loss for the year ended 30 September 20X3 Polestar $000 110,000 (88,000) 22,000 Revenue Cost of sales Gross profit Distribution costs Administrative expenses Finance costs Profit (loss) before tax Income tax (expense)/relief Profit (loss) for the year Statements of financial position as at 30 September 20X3 Assets Non-current assets Property, plant and equipment Financial asset: equity investments (Note (iii)) Current assets Total assets Equity and liabilities Equity Equity shares of 50 cents each Retained earnings Current liabilities Total equity and liabilities (3,000) (5,250) (250) 13,500 (3,500) 10,000 Polestar $000 41,000 16,000 57,000 16,500 73,500 30,000 28,500 58,500 15,000 73,500 Southstar $000 66,000 (67,200) (1,200) (2,000) (2,400) (5,600) 1,000 (4,600) Southstar $000 21,000 21,000 4,800 25,800 6,000 12,000 18,000 7,800 25,800