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    Question

    Which of the statements is true with respect to

    dividend?   A.    Dividend should be declared only out of profits earned by the company B.    Capital profit realized in cash can be used for paying dividend. C.   Dividend proposed by the company after balance sheet date is a current liability
    A Only A Correct Answer Incorrect Answer
    B A and B Correct Answer Incorrect Answer
    C A and C Correct Answer Incorrect Answer
    D B and C Correct Answer Incorrect Answer
    E All correct Correct Answer Incorrect Answer

    Solution

    Dividend shall not be declared out of the Securities Premium Account or the Capital Redemption Reserve or Revaluation Reserve or Amalgamation Reserve or out of profits on reissue of forfeited shares or out of profits earned prior to incorporation of the company. No Dividend shall be declared or paid by a company from its reserves other than free reserves [Third Proviso to sub-section (1) of Section 123 of the Act] Dividend should be declared only out of profits earned by the company. However, profits out of capital transactions, if not realised in cash, shall be excluded for this purpose. Certain profits do not arise in the normal course of business as they are earned out of capital transactions. These profits are known as capital profits and are not available for distribution as Dividend. However, profit on sale of fixed assets, though capital profit , can be utilised for distribution if such profit is actually realised in cash and such distribution is not contrary to the Memorandum and Articles of Association of the company. Further, any specific reserve created out of the profits of the company on account of any statutory requirement would become available for distribution as Dividend only after the purpose for which such reserve was created is achieved e.g, Debenture Redemption Reserve would be available for distribution as Dividend after the redemption of debentures. Dividend is a contingent liability till it is proposed and not approved in the AGM. If an enterprise declares dividends to shareholders after the balance sheet date, the enterprise should not recognise those dividends as a liability at the balance sheet date unless a statute requires otherwise. Such dividends should be disclosed in notes.

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