Loan capital

Each in turn:

1) This is clearly incorrect. If there are no ‘distributable profits’ then the preference shareholders will probably discover that the directors fail to propose a preference dividend. Even though a dividend is not paid, for it to be ranked as a liability, it must as a minimum be declared … but then not paid. In addition, although most preference shares are classed / issued as ‘cumulative preference shares’ it is possible to issue preference shares that are not ‘cumulative’. The expression ‘cumulative’ tells us that, where in any particular year the preference dividend is not paid (even though it has been declared), the unpaid dividend from one year will roll up into subsequent years when hopefully there will be sufficient distributable profits to finance the accumulated dividends.

2) According to legislation, dividends may only be financed by ‘accumulated realised profits less accumulated realised losses’. Thus it can clearly be seen that accumulated losses from earlier years must be taken into account when calculating the distributability of this year’s profits.

3) It is the one of jobs of shareholders in general meetings to approve the dividend proposed by the directors. It’s part of the ‘ordinary business’ of an AGM. It IS possible (although I’ve never heard of it happening!) that the attending and voting members at an AGM may approve a dividend LOWER than that proposed by the directors. But the dividend approved cannot be greater than the dividend proposed by the board.

4) the depreciation charged on the increased amount of the revalued asset is treated as a realised profit when computing ‘distributable profits’.

So, in summary, the correct answer should be option 3.

Well done