Y plc acquired 80% of the ordinary share capital of Z plc for £180,000 and 55% of the issued 7% cumulative preference shares for £15,000, both purchases being effected on 1 June 2022. The following balances are taken from the books of the two companies at 31 May 2023:

• Ordinary share capital (£1 shares):
  • Y plc: £500,000
  • Z plc: £200,000
• 7% cumulative preference shares (50p shares):
  • Y plc: £0
  • Z plc: £35,000
• Share premium account:
  • Y plc: £40,000
  • Z plc: £20,000
• General reserve:
  • Y plc: £90,000
  • Z plc: £30,000
• Retained profits:
  • Y plc: £80,000
  • Z plc: £60,000
• Trade accounts payable:
  • Y plc: £60,000
  • Z plc: £30,000
• Taxation:
  • Y plc: £70,000
  • Z plc: £40,000
• Depreciation:
  • Freehold property:
    • Y plc: £60,000
    • Z plc: £25,000
  • Plant and machinery:
    • Y plc: £160,000
    • Z plc: £75,000
• Freehold property at cost:
  • Y plc: £120,000
  • Z plc: £45,000
• Plant and machinery at cost:
  • Y plc: £320,000
  • Z plc: £190,000
• Investment in Z plc:
  • Y plc: £180,000
  • Z plc: £0
• Inventory:
  • Y plc: £150,000
  • Z plc: £90,000
• Accounts receivable:
  • Y plc: £60,000
  • Z plc: £35,000
• Cash:
  • Y plc: £35,000
  • Z plc: £12,000

The following additional information is available: (a) Inventory of Y plc includes goods purchased from Z plc for £25,000. Z plc charged out these inventory at cost plus 20%. (b) A proposed dividend of £12,000 by Z plc includes a full year's preference dividend. No interim dividends were paid during the year by either company. (c) Creditors of Y plc include £8,000 payable to Z plc in respect of inventory purchases. Debtors of Z plc include £15,000 due from Y plc. The parent sent a cheque for £6,000 to its subsidiary on 30 May 2023 which was not received by Z plc until June 2023. (d) At 1 June 2022 the balances on the reserves of Z plc were as follows:

• Share premium: £12,000
• General reserve: £20,000
• Retained profits: £40,000

Required:

1. Prepare a consolidated balance sheet for Y plc and its subsidiary Z plc at 31 May 2023. Notes to the accounts are not required. Workings must be shown.
2. Discuss the accounting treatment of inter-company loans in the consolidated financial statements.