QUESTION 1

The Murray Corporations Trial Balance as at December 31, 2014 is shown below.

	$	$
Premises	670,000
10 % Debenture		300,000
Retained Earnings Jan 1, 2014		167,000
Trade receivables	200,000
Trade payables		154,000
Administrative Expenses	175,000
Selling & Distribution Costs	150,000
Other Operating Expenses	66,000
Provision for bad debt		9,000
Rent Received		72,000
Sales		2,500,000
Cost of Sales	1,700,000
Fixtures & Fittings	230,000
Prov. For Dep'n: Fix & Fit		23,000
Inventory at Dec 31, 2014	170,000
Debenture Interest Paid	15,000
Interim Ordinary dividends	14,000
General Reserves		175,000
Ordinary Shares @ $1.00		350,000
6 % Preference Shares @ $2		100,000
Cash and bank	460,000
	3,850,000	3,850,000

The following additional information is available:

1. Debtors totaling $10,000 are to be written off and the provision for bad debts increased to $11,000.

2. Accruals and prepayments: Prepayments Accruals

$000 $000

Distribution costs 30 50

Administrative expenses 20 30

3. Depreciation should be provided as follows:

Premises Nil

Fixtures and Fittings 10 percent per year on the reducing balance

Depreciation is to be divided equally between distribution cost and administrative expenses

4. Corporation tax is estimated to be $100,000

5. The directors proposed on December 30, 2014 to pay the total preference share dividends. On January 20, 2015 the directors decided to pay a further $0.05 ordinary dividend.

Required:

Prepare the financial statements for the year to 31 December 2014 for Murray Corp. in accordance with International Financial Reporting Standards as far as the information permits. They should include:

1. An Income Statement; (12 marks)

1. A Statement of Changes in Equity (8 marks)

1. At a recent board meeting of the Murray Corporation a member of the board questioned the policy of the organization in making dividend declaration. He presented some theories of dividend policy but failed to explain the Signalling theory. As the financial controller of the company you were asked to explain the Signalling theory.

Briefly explain the Signalling theory. (5 marks)