Section A

How are 'distributable profits' defined for the purpose of a private company declaring a lawful dividend?

Answer options:

Accumulated, realised profits less accumulated, realised losses.

Total assets less total liabilities.

Accumulated, realised and unrealised profits less accumulated, realised losses.

The net profit for the current financial year only.

How to approach this question

Identify the strict accounting definition used by the Companies Act to ensure capital maintenance when paying dividends.

Full Answer

A.Accumulated, realised profits less accumulated, realised losses.✓ Correct

Under the Companies Act 2006, a company may only make a distribution out of profits available for the purpose. These are defined as accumulated, realised profits (so far as not previously utilized) less accumulated, realised losses (so far as not previously written off).

Common mistakes

Including unrealised profits (like property revaluations) in the calculation for a private company.

Question 13 All questions Question 15

Practice the full ACCA LW — Corporate and Business Law Practice Exam 6

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