31. On 1 January 20X6, Laurel Co acquired 60% of the equity share capital of Rakewood Co in a share exchange in which Laurel Co issued three new shares for every five shares it acquired in Rakewood Co. The share issue has not yet been recorded by Laurel Co. Additionally, on 31 December 20X6, Laurel Co will pay to the shareholders of Rakewood Co $1.62 per share acquired. Laurel Co's cost of capital is 8% per annum.
At the date of acquisition, shares in Laurel Co and Rakewood Co had a market value of $7.00 and $2.00 each respectively
STATEMENTS OF PROFIT OR LOSS FOR THE YEAR ENDED 30 SEPTEMBER 20X6
Laurel Co Rakewood Co
Revenue 84,500 52,000
Cost of sales (58,200) (34,000)
Gross profit 26,300 18,000
Distribution costs (2,000) (1,600)
Administrative expenses (4,100) (2,800)
Investment income (note (iv)) 500 400
Finance costs (300) nil
Profit before tax 20,400 14,000
Income tax expense (4,800) (3,600)
Profit for the year 15,600 10,400
Equity as at 1 October 20X5 $'000 $'000
Equity shares of $1 each 20,000 15,000
Retained earnings 72,000 25,000
The following information is relevant
1. At the date of acquisition, Laurel Co conducted a fair value exercise on Rakewood Co's net assets which were equal to their carrying amounts with the following exceptions:
- An item of plant had a fair value of $4m above its carrying amount. At the date of acquisition it had a remaining life of two years
- Inventory of $800,000 had a fair value of $1m. All of this inventory had been sold by 30 September 20X6.
2. Laurel Co's policy is to value the non-controlling interest at fair value at the date of acquisition. For this purpose Rakewood Co's share price at 1 January 20X6 can be deemed to be representative of the fair value of the shares held by the non-controlling interest.
3. Laurel Co had traded with Rakewood Co for many years before the acquisition. Sales from Rakewood Co to Laurel Co throughout the year ended 30 September 20X6 were consistently $1.2m per month. Rakewood Co made a mark-up on cost of 20% on these sales. Laurel Co had $1.8m of these goods in inventory as at 30 September 20X6.
4. Laurel Co's investment income consists of
- Its share of a dividend of $500,000 paid by Rakewood Co in August 20X6
- A dividend of $200,000 received from Artic Co, a 25% owned associate which it has held for several years. The profit after tax of Artic Co for the year ended 30 September 20X6 was $2.4m.
5. Assume, except where indicated otherwise, that all items of income and expense accrue evenly throughout the year.
6. There were no impairment losses within the group during the year ended 30 September 20X6.