Duke Co is a retailer with stores in numerous city centres. On 1 January 20X8, Duke Co

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Duke Co is a retailer with stores in numerous city centres. On 1 January 20X8, Duke Co acquired 80% of the equity share capital of Smooth Co, a service company specialising in training and recruitment. This was the first time Duke Co had acquired a subsidiary.

The consideration for Smooth Co consisted of a cash element and the issue of some shares in Duke Co to the previous owners of Smooth Co.

Duke Co has begun to consolidate Smooth Co into its financial statements, but has yet to calculate the non-controlling interest and retained earnings. Details of the relevant information is provided in notes (i) and (ii).

Extracts from the financial statements for the Duke group for the year ended 30 June 20X8 and Duke Co for the year ended 30 June 20X7 are provided below:

	Duke Group 30 June 20X8 $'000	Duke Co 30 June 20X7 $'000
Profit from operations	14,500	12,700
Current assets	30,400	28,750
Share capital	11,000	8,000
Share premium	6,000	2,000
Retained earnings	Note (i) and (ii)	9,400
Non-controlling interest	Note (i) and (ii)	Nil
Long-term loans	11,500	7,000
Current liabilities	21,300	15,600

The following notes are relevant:

(i) The fair value of the non-controlling interest in Smooth Co at 1 January 20X8 was deemed to be $3.4m. The retained earnings of Duke Co in its individual financial statements at 30 June 20X8 are $13.2m. Smooth Co made a profit for the year ended 30 June 20X8 of $7m. Duke Co incurred professional fees of $0.5m during the acquisition, which have been capitalised as an asset in the consolidated financial statements.

(ii) The following issues are also relevant to the calculation of non-controlling interest and retained earnings:

- At acquisition, Smooth Co’s net assets were equal to their carrying amount with the exception of a brand name which had a fair value of $3m but was not recognised in Smooth Co’s individual financial statements. It is estimated that the brand had a five-year life at 1 January 20X8.

- On 30 June 20X8, Smooth Co sold land to Duke Co for $4m when it had a carrying amount of $2.5m.

(iii) Smooth Co is based in the service industry and a significant part of its business comes from three large, profitable contracts with entities that are both well-established and financially stable.

(iv) Duke Co did not borrow additional funds during the current year and has never used a bank overdraft facility.

(v) The following ratios have been correctly calculated based on the above financial statements:

	20X8	20X7
Receivables collection period	52 days	34 days
Inventory holding period	41 days	67 days

Other than the recognition of the non-controlling interest and retained earnings, no adjustment is required to any of the other figures in the draft financial statements. All items are deemed to accrue evenly across the year.

(a) Calculate the non-controlling interest and retained earnings to be included in the consolidated financial statements at 30 June 20X8. (6 marks)

(b) Based on your answer to part (a) and the financial statements provided, calculate the following ratios for the years ending 30 June 20X7 and 30 June 20X8:

Current ratio
Return on capital employed
Gearing (debt/equity)
(4 marks)

(c) Using the information provided and the ratios calculated above, comment on the comparative performance and position for the two years ended 30 June 20X7 and 20X8.