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ACCA Applied Skills · Corporate and Business Law (Global) · Capital maintenance and dividend law

Brindle Co has issued share capital of $400,000 and a share premium account of $100,000. It has accumulated realised profits of $60,000 and unrealised revaluation gains of $90,000 on land. There are no accumulated losses. The directors want to know the maximum lawful distribution under the general rule that dividends may be paid only out of distributable profits. Which amount is correct?

The maximum lawful dividend is $60,000. Only accumulated realised profits, less any realised losses, can be distributed. Share capital, share premium and unrealised revaluation gains form part of the protected capital base, so they cannot be paid out as dividends.

  1. A$60,000Correct
  2. B$150,000
  3. C$250,000
  4. D$90,000

Explanation

Dividends may be paid only from accumulated realised profits less accumulated realised losses. Realised profits are $60,000 with no losses, so $60,000 is distributable. $150,000 wrongly adds the unrealised gains; $250,000 adds the unrealised gains and share premium; $90,000 uses only the unrealised gains. Share capital, share premium and revaluation gains are not distributable.

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