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

Zeta Co has a general rule in its jurisdiction that dividends may be paid only out of profits available for distribution. At the year end, Zeta has retained profits of $400,000 brought forward, a loss for the current year of $90,000, and a share premium account of $250,000. Which amount represents the maximum dividend Zeta can lawfully pay, applying the usual common law-based rule on distributable profits?

The maximum lawful dividend is $310,000. Distributions come from accumulated realised profits net of accumulated realised losses, so the $90,000 current loss reduces the $400,000 retained profits. Share premium is undistributable capital and cannot be used to fund the dividend.

  1. A$310,000Correct
  2. B$400,000
  3. C$560,000
  4. D$650,000

Explanation

Distributable profits are accumulated realised profits less accumulated realised losses: $400,000 - $90,000 = $310,000. The share premium account is capital and cannot be distributed, so $560,000 and $650,000 wrongly include it. $400,000 ignores the current year loss.

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