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

Dovetail Ltd has accumulated realised profits of $400,000, accumulated realised losses of $150,000 and an unrealised revaluation surplus of $200,000 on land. It proposes a dividend of $300,000. Applying the general rule for distributable profits, which is correct?

The dividend is unlawful. Distributable profits equal accumulated realised profits of $400,000 less accumulated realised losses of $150,000, giving $250,000. The unrealised revaluation surplus cannot be distributed, so a $300,000 dividend exceeds the amount available.

  1. AThe dividend is lawful because total profits including the surplus are $450,000
  2. BThe dividend is unlawful because distributable profits are only $250,000Correct
  3. CThe dividend is lawful because the revaluation surplus is added to realised profits and losses ignored

Explanation

Distributable profits are accumulated realised profits less accumulated realised losses: 400,000 - 150,000 = 250,000. The unrealised surplus of 200,000 is excluded. A 300,000 dividend therefore exceeds the 250,000 available. The 450,000 option wrongly includes unrealised profit net of losses.

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