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4Mike,
Could you help me out with this particular question, BPP 18.5(MTQ), not sure you have the revision kit, so here’s the question:
Dee and Elf are major shareholders in, and the directors of, Fan CO. For the year ended 30 April 20X8 Fan Co;s financial statements showed a loss of $2000 for the year and no profits were carried forward. For the year ended 30 April 20X9 Fan Co made a profit of $3000. Also, due to a revaluation, the value of its land and buildings increased by $5000. As a consequence Dee and Eff recommended, and the shareholders approved, the payment of $4000 in dividends.
1) Explain the legality of the dividend payment
I got all the principles right on this, i.e. the revaluation doesn’t count as a distributable profit and therefore the dividend number agreed upon is wrong. My problem arose when calculating the right number. I distinctly remember us carrying forward losses in the small example we did in the Capital Maintenance Chapter, especially since its accumulated Losses. Therefore, in this question, why is the distributable profit not $1000. ($2000) from last year + $3000, = $1000, rather than $3000 which the answer refers to. They only took the profit for that one year and ignored previous years losses. Do we do that for all calculations for realized profit or am I missing something in this particular scenario?
Thank you!
“or am I missing something in this particular scenario?”
It’s not a good question in one respect (at least!)
The question states that there were no profits carried forward (at 30 April, 2008)
But it doesn’t state that there were any losses carried forward either!
My initial reading on this was that there HAD been profits brought forward at 30 April, 2007, that the $2,000 loss in the year to 30 April, 2008 wiped out those profits brought forward and that there were neither profits nor losses carried forward at 30 April, 2008
In which case, $3,000 would be distributable (you have correctly ignored the revaluation gain)
But apparently those 2007 $2,000 losses WERE carried forward so they have to be made good before any current year profits can be distributed
OK? Poor question 🙁
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