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Dear Sir,
My understanding is that dividend cannot be paid out from undistributable reserve.If it is correct then I am confused with below question. Could you kindly help me?
In relation to the payment of dividends, which of the following will be included in the profit available for distribution in a company’s current financial year?
A. An increase in the asset value of a head office building that occurred during the current financial year
B. Profit on the sale of an asset sold after the end of the current financial year
C. A depreciation charge made in the current financial year
D: A premium received on the nominal value of shares issued in the current financial yearThe answer provided by the book is D with the following explanation:
A public company may make a distribution as long as its net assets are not less then its share capital plus its undistributable reserve.
Doesn’t the premium received on the nominal value of share go on premium account?
If yes, is not the premium account undistributable reserve?My answer was C as the depreciation will be included in the calculation of the profit ( in this case by reducing), but I am not fully convinced.
Thanks in advance for your help
Gabbi
WELL!!!
Where’s this one from?
There are two undistributable reserves specified by name in Companies Act – the Capital Redemption Reserve and the Share Premium Account. There are other undistributable reserves but they are not specified in company legislation – “accumulated unrealised profits ……… less accumulated unrealised losses ………” is the short form of the “definition”
Quite clearly the Share Premium Account balance is a statutory capital undistributable reserve.
And re answer c) you’re quite correct – it will be taken into account in arriving at the amount of distributable profits.
Interestingly, the “extra” depreciation calculated on the unrealised profit element of a revalued asset is added back in the calculation of distributability – why should distributable profits be “hit” by this extra depreciation caused by a book adjustment to increase the carrying value of an asset
Ok (I agree with you with answer c), but it’s not a good question in my opinion)
Dear Sir,
This question is from BPP exam kit, so disappointed again.
I do fully agreed with you and when I have answer the question I made the same consideration that you have written.
Really do appreciate your help and your explanation.
Thank you so much
Gabbi
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