Question Two

Yava Plc is both a wholesaler and retailer of hardware products. It was formed 10 years ago. The management of the company has started implementing growth strategy of the company by investing in other companies, both direct and indirect competitors. The company made the following investments:

Investment in Wana Limited

Yava Plc acquired 18% of the equity shares in Wana Limited for a cash consideration of K120,000 on 1 January 2019. Yava Plc incurred legal costs of K7,000 to complete the purchase of the shares. Yava Plc intends to sell the shares when their value is atleast K150,000. During the year to 31 December 2019, Wana Plc made profit after tax of K10,000 and dividends of K8,000 were paid. The 18% investment in Wana Plc had a fair value of K132,000 as at 31 December 2019.

Investment in Loko Plc

On 1 January 2019, Yava Plc acquired 15% of the equity shares in Loko Plc for a cash consideration of K90,000 when the fair value of net assets of Loko stood at K600,000. The shareholding entitled Yava Plc to two (2) seats on the board of directors and to participating in the financial and operating decisions and policies of Loko Plc. During the year to 31 December 2019, Loko Plc made profit after tax of K30,000 and paid out dividends of K10,000. The management of Yava Plc need your advise on the accounting treatment of investments above in their consolidated financial statements.

Required:

Advise the management of Yava Plc how the above investments should be treated in their consolidated financial statements for the year 31 December 2019. (Your answer should include relevant work)

20 marks