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Dee and Eff are major shareholders in, and the directors of, the public company, Fan pic. For the year ended 30 April 2009 Fan pc’s financial statements showed a loss of £2,000 for the
vear.
For the year ended 30 April 2010 Fan pc made a profit of £3,000 and, 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.Question=
Which of the following TWO statements are correct?
The company could recover the distribution from Dee and Eff
The company could not recover the distribution from Dee and Eff
The company could recover the distribution from other shareholders
The company could not recover the distribution from other shareholdersAnswer is 1 and 3, firstly any div paid other than out of distributable profit is unlawful. Since here the company was in losses of 2000 in 2009 and had a profit of 3000. That makes dis prof of 1000. So as shareholders approved a higher dividend knowingly than could be paid out of profits so company can recover from them? Is this the reason?
Yes. Distributable profits are profits that would otherwise be available for distribution and, in detail, that’s accumulated realised profits (blah blah blah) less accumulated realised losses (blah blah blah)
In addition, for public companies, there is the further restriction that there should be retained sufficient distributable profits to make good any unrealised losses.
So the mathematics here are £2,000 realised loss brought forward and £3,000 realised profit for the year giving us £1,000 accumulated realised profits less accumulated realised losses ie distributable profits
The kicker here is that, although there is a further £5,000 profits in the increase in the value of the land and buildings, a revaluation increase does not get taken into account in the calculation of accumulated REALISED profits less accumulated REALISED losses.
If you wanted a short answer to your post, it’s Yes.
OK?
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