Answer to Question #218312 in Economics for geoffrey

Question

On 1 January 2020, Yunza Co acquired 75% of Lato Co’s equity shares by means of a share exchange of two 

shares in Yunza Co for every three Lato Co shares acquired. On that date, further consideration was also 

issued to the shareholders of Lato Co in the form of a K100 8% loan note for every 100 shares acquired in 

Lato Co. None of the purchase consideration, nor the outstanding interest on the loan notes at 31 March 2020, 

has yet been recorded by Yunza Co. At the date of acquisition, the share price of Yunza Co and Lato Co is 

K3·20 and K1·80 respectively.

The summarised statements of financial position of the two companies as at 31 March 2020 are:

Yunza Co Lato Co

K’000 K’000

Assets

Non-current assets

Property, plant and equipment (note (i)) 75,200 31,500

Investment in Zed Co at 1 April 2019 (note (iv)) 4,500 –

–––––––– –––––––

79,700 31,500

Current assets

Inventory (note (iii)) 19,400 18,800

Trade receivables (note (iii)) 14,700 12,500

Bank 1,200 600

–––––––– –––––––

35,300 31,900

Total assets

–––––––– –––––––

115,000 63,400

–––––––– –––––––

Equity and liabilities

Equity

Equity shares of K1 each 50,000 20,000

Retained earnings – at 1 April 2019 20,000 19,000

– for year ended 31 March 2020 16,000 8,000

–––––––– –––––––

86,000 47,000

Non-current liabilities

8% loan notes 5,000 nil

Current liabilities (note (iii)) 24,000 16,400

–––––––– –––––––

29,000 16,400

Total equity and liabilities

–––––––– –––––––

115,000 63,400

–––––––– –––––––

The following information is relevant:

(i) At the date of acquisition, the fair values of Lato Co’s assets were equal to their carrying amounts. However, Lato Co 

operates a mine which requires to be decommissioned in five years’ time. No provision has been made for these 

decommissioning costs by Lato Co. The present value (discounted at 8%) of the decommissioning is estimated at 

K4m and will be paid five years from the date of acquisition (the end of the mine’s life).

(ii) Yunza Co’s policy is to value the non-controlling interest at fair value at the date of acquisition. Lato Co’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.

(iii) The inventory of Lato Co includes goods bought from Yunza Co for K2·1m. Yunza Co applies a consistent 

mark-up on cost of 40% when arriving at its selling prices.

On 28 March 2020, Yunza Co despatched goods to Lato Co with a selling price of K700,000. These were 

not received by Lato Co until after the year end and so have not been included in the above inventory at 

31 March 2020.

At 31 March 2020, Yunza Co’s records showed a receivable due from Lato Co of K3m, this differed to the 

equivalent payable in Lato Co’s records due to the goods in transit.2

The intra-group reconciliation should be achieved by assuming that Lato Co had received the goods in 

transit before the year end.

(iv) The investment in Zed Co represents 30% of its voting share capital and Yunza Co uses equity 

accounting to account for this investment. Zed Co’s profit for the year ended 31 March 2020 was K6m and 

Zed Co paid total dividends during the year ended 31 March 2020 of K2m. Yunza Co has recorded its 

share of the dividend received from Zed Co in investment income (and cash).

(v) All profits and losses accrued evenly throughout the year.

(vi) There were no impairment losses within the group for the year ended 31 March 2020.

Required:

Prepare the consolidated statement of financial position for Yunza Co as at 31 March 2020

Answer 1

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