QUESTION 1 On 1 July 2019 Lulu plc acquired 80% of the ordinary share capital Shake- Shake plc at a cost of K10, 280,000. On the same date it also acquired 50% of Shake-Shake's 10% loan notes at par. The summarized draft financial statements of both companies are: Income Statements for the year ended 31 March 2020 Lulu pic Shake-Shake plc K'000 K'000 Sales revenue 60,000 24,000 Cost of sales (42,000) (20,000) Gross profit 18,000 4,000 Operating expenses (6,000) (200) Loan interest received (paid) 75 (200) Profit before tax 12,075 3.600 Income tax (3,000) (600) Profit for the period 9.075 3,000 in Parts for the year ended 31 March 2020 Statement of Changes in Equity for the year ended 31 March 2020 Retained profits b/d Profit for the period Retained profit c/d Lulu plc K'000 16,525 9,075 25,600 Shake-Shake plc K'000 5,400 3,000 8,400 The following information is relevant: 1. The fair values of Shake-Shake's assets were equal to their book values with the exception of its plant, which had a fair value of K3.2million in excess of its book value at the date of acquisition. The remaining life of all of Shake-Shake's plant at the date of its acquisition was four years and this period has not changed as a result of the acquisition. Depreciation of plant is on a straight-line basis and changed to cost of sales. Shake-Shake's plc has not adjusted the value of its plant as a result of the fair value exercise. ii. In the post-acquisition period Lulu plc sold goods to Shake-Shake at a price of K12 million. These goods had cost Lulu plc K9 million. During the year Shake-Shake had sold goods K10 million (at cost to Shake-Shake) of these goods for 15 million. iii. Lulu plc bears almost all of the administration costs incurred on behalf of the group (invoicing, credit control etc), it does not charge Shake-Shake for this exercise as to do would not have a material effect on the group profit. Statement of Financial Position as at 31 March 2020 Lulu plc K'000 Shake-Shake plc K'000 19,320 8,000 Assets Tangible non-current assets Investments Current assets Total assets Equity shares of K1 each Retained earnings Non-current liabilities 10% loan notes Current liabilities Total equity and liabilities 11,280 15,000 45,600 10.000 25,600 8,000 16,000 2,000 8,400 10,000. 45.600 2,000 3.600 16.000 iv. Revenues and profits should be deemed to accrue evenly throughout the year. The current accounts of the two companies were reconciled at the year end with sulphate plc owing hydrogen plc K750,000. The goodwill was reviewed for impairment at the end of the reporting period and had suffered an impairment loss of K300,000 which is to be treated as an operating expense. vi. Required: Prepare a consolidated Income Statement for the year ended 31 March 2008 and Statement of Financial position as at 31 March 2008. Required: 1. To prepare the consolidated Income Statement for the year ended 31 March 2020; (10 Marks ii. To prepare the consolidated statement of financial position (Balance Sheet) as at that date. (10 Marks Total 20 Marks QUESTION 2 QUESTION 1 On 1 July 2019 Lulu plc acquired 80% of the ordinary share capital Shake- Shake plc at a cost of K10, 280,000. On the same date it also acquired 50% of Shake-Shake's 10% loan notes at par. The summarized draft financial statements of both companies are: Income Statements for the year ended 31 March 2020 Lulu pic Shake-Shake plc K'000 K'000 Sales revenue 60,000 24,000 Cost of sales (42,000) (20,000) Gross profit 18,000 4,000 Operating expenses (6,000) (200) Loan interest received (paid) 75 (200) Profit before tax 12,075 3.600 Income tax (3,000) (600) Profit for the period 9.075 3,000 in Parts for the year ended 31 March 2020 Statement of Changes in Equity for the year ended 31 March 2020 Retained profits b/d Profit for the period Retained profit c/d Lulu plc K'000 16,525 9,075 25,600 Shake-Shake plc K'000 5,400 3,000 8,400 The following information is relevant: 1. The fair values of Shake-Shake's assets were equal to their book values with the exception of its plant, which had a fair value of K3.2million in excess of its book value at the date of acquisition. The remaining life of all of Shake-Shake's plant at the date of its acquisition was four years and this period has not changed as a result of the acquisition. Depreciation of plant is on a straight-line basis and changed to cost of sales. Shake-Shake's plc has not adjusted the value of its plant as a result of the fair value exercise. ii. In the post-acquisition period Lulu plc sold goods to Shake-Shake at a price of K12 million. These goods had cost Lulu plc K9 million. During the year Shake-Shake had sold goods K10 million (at cost to Shake-Shake) of these goods for 15 million. iii. Lulu plc bears almost all of the administration costs incurred on behalf of the group (invoicing, credit control etc), it does not charge Shake-Shake for this exercise as to do would not have a material effect on the group profit. Statement of Financial Position as at 31 March 2020 Lulu plc K'000 Shake-Shake plc K'000 19,320 8,000 Assets Tangible non-current assets Investments Current assets Total assets Equity shares of K1 each Retained earnings Non-current liabilities 10% loan notes Current liabilities Total equity and liabilities 11,280 15,000 45,600 10.000 25,600 8,000 16,000 2,000 8,400 10,000. 45.600 2,000 3.600 16.000 iv. Revenues and profits should be deemed to accrue evenly throughout the year. The current accounts of the two companies were reconciled at the year end with sulphate plc owing hydrogen plc K750,000. The goodwill was reviewed for impairment at the end of the reporting period and had suffered an impairment loss of K300,000 which is to be treated as an operating expense. vi. Required: Prepare a consolidated Income Statement for the year ended 31 March 2008 and Statement of Financial position as at 31 March 2008. Required: 1. To prepare the consolidated Income Statement for the year ended 31 March 2020; (10 Marks ii. To prepare the consolidated statement of financial position (Balance Sheet) as at that date. (10 Marks Total 20 Marks QUESTION 2