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Dee and Eff are major shareholders in, and the directors of, Fan Ltd. For the year ended 30 April 20X8 Fan
Ltd’s financial statements showed a loss of £2,000 for the year and no profits were carried forward. For the
year ended 30 April 20X9 Fan Ltd made a profit of £3,000. Also, due to a revaluation, the value of its land
and buildings increased by £5,000. As a consequence, Dee and Eff recommended, and the shareholders
approved, the payment of £4,000 in dividends.
Required
(a) Explain the legality of the dividend paymentSir we know that dividend must be paid from distributable profits only. i.e sharecapital, share premium and revaluation reserve must be ignored.
Sir in the above question while paying dividends we will consider Profits available for distribution = Accumulated realized profits – Accumulated realized losses = $3000 – $2000 = $1000. Or would we consider just Accumulated realized profits (i.e $3000)?
The question doesn’t say whether the $2,000 loss was covered by accumulated profits brought forward and your post says there was no PROFITS carried forward but says nothing about any accumulated losses carried forward
In the absence of accurate information, assuming the $2,000 loss was NOT covered by accumulated retained earnings BROUGHT forward, the maximum distributable amount would be $3,000 – $2,000 = $1,000
OK?
Sir in the kaplan answer , the following is written:
Only accumulated profit is a distributable reserve out of which dividends may be paid. In Fan Ltd’s case the total is £3,000 for the year and no profits were brought forward from previous years. The profit on revaluation of land and buildings is credited to the revaluation reserve, not to the profit and loss reserve and is not distributable.
For the year in question, £4,000 was paid as a dividend. The payment would only be legal if the company had accumulated realised profits equal to or greater than £4,000. The company only had £3,000 and therefore the payment is illegal.
Sir in the above answer they have mentioned that company only had £3,000 and therefore the payment is illegal. I want to ask that while paying dividend , we will only consider this £3,000 (i.e accumulated realized profits) OR would we consider £3,000 – £2,000 = £1000 (i.e distributable profits)?
Sir I did not understand. Please tel me only this that while paying dividend , we will only consider this £3,000 OR would we consider £3,000 – £2,000 = £1000?
If there is a loss brought forward that loss must be covered before any distribution can be made
If there were a profit this year of $3,000 and a loss brought forward of $4,000, no dividend can be paid and accumulated losses to carry forward will be $1,000
If there were a profit this year and a loss brought forward of $2,500, the maximum amount that could be paid is $500
If there were a profit this year of $8,000 and a loss brought forward of $2,000, the maximum amount that could be paid is $6,000
OK?
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