Chapter 10 – Dividend and Interest,

11 Dec 2020 4:54 pm

Chapter 10, Dividend and Interest, hsc, sp, secretarial practice, maharashtra board, full solution,

Chapter 10: Dividend and Interest

Select the correct answer from the options given below and rewrite the statement.

1.Dividend is paid to ___________.

Options
  • Shareholder
  • Debentureholder
  • Depositor

2._________ is profit shared by company with a shareholder.

Options
  • Interest
  • Rent
  • Dividend

3.Dividend is recommended by ______________.

Options

  • Managing Director
  • Secretary
  • Board of Directors

4.Interim Dividend is declared by ______________.

Options
  • Board of Directors
  • Debentureholders
  • Depositors

5.Final Dividend is declared by ______________.

Options
  • Board of Directors
  • shareholders
  • Depositors

6.Dividend cannot be declared out of ______________.

Options
  • Capital
  • Profit
  • Reserves

7.Dividend amount should be transferred in a separate Bank Account within ____________ days of its declaration

Options
  • 5
  • 15
  • 15

8.Dividend should be paid within ________________ days of its declaration

Options
  • 3
  • 13
  • 30

9.__________ holders get dividend from residual profits.

Options
  • Equity share
  • Preference share
  • Debenture

10.Dividend is paid first to __________ shareholders.

Options
  • Equity
  • Preference
  • Deferred

11._________ warrant is a cheque containing dividend amount sent by company to the shareholders.

Options
  • Dividend
  • Share
  • Interest

12.IEPF is created by ______________ where unpaid dividend is transferred by company.

Options
  • Central Govt.
  • Company
  • Shareholders

13.Payment of __________  Dividend must be authorised by the Articles of Association.

Options
  • Interim
  • Final
  • Bonus

14.___________ is a return paid to creditors by the company.

Options
  • Dividend
  • Interest
  • Rent

15.___________ is not linked to profits of the company

Options
  • Dividend
  • Interest
  • Bonus

Match the pairs.

Group ‘A’Group ‘B’
a) Dividend1) Equity Shareholders
b) Interest2) Appropriation of profit.
c) Interim Dividend3) Recommendation of Secretary.
d) Final Dividend4) Registrar of company.
e) Fluctuating Rate of Dividend5) Obligatory to pay
 6) Decided and Declared by the Board of Directors.
 7) Decided by Board; declared by Members.
 8) Decided by President of India.
 9) Company not allowed to pay.
 10) Declared by Govt. of India

SOLUTION

Group ‘A’Group ‘B’
a) Dividend2) Appropriation of profit.
b) Interest5) Obligatory to pay
c) Interim Dividend6) Decided and Declared by the Board of Directors.
d) Final Dividend7) Decided by Board; declared by Members.
e) Fluctuating Rate of Dividend1) Equity Shareholders

2.Match the pairs.

Group ‘A’Group ‘B’
a) Dividend1) Must inform stock exchange about Dividend declaration
b) Interest2) Creditors
c) IEPF3) Registered Shareholders.
d) Unpaid Dividend Account4) Balance of unpaid Dividend Transferred here.
e) Listed Company5) Unregistered company.
 6) Non-listed company.
 7) Unpaid/Unclaimed Dividend.
 8) Balance of unpaid Bonus transferred here.
 9) Must inform Government about Dividend declaration.
 10) General Public.

SOLUTION

Group ‘A’Group ‘B’
a) Dividend3) Registered Shareholders.
b) Interest2) Creditors
c) IEPF4) Balance of unpaid Dividend Transferred here.
d) Unpaid Dividend Account7) Unpaid/Unclaimed Dividend.
e) Listed Company1) Must inform stock exchange about Dividend declaration

Write a word or a term or a phrase which can substitute the following statement.

1.The return on investment paid to the shareholders of the company.

SOLUTION

The return on investment paid to the shareholders of the company. – Dividend

2.The meeting where final dividend is declared.

SOLUTION

The meeting where final dividend is declared. – Annual General Meeting (AGM)

3.The company which has to intimate stock exchange about declaration of dividend.

SOLUTION

The company which has to intimate stock exchange about declaration of dividend. – Listed Company

4.The shareholders who get dividend at a fixed rate.

SOLUTION

The shareholders who get dividend at a fixed rate. – Preference Shareholders

5.The shareholders who get dividend at a fluctuating rate.

SOLUTION

The shareholders who get dividend at a fluctuating rate. – Equity Shareholders

6.Request by shareholder in prescribed form for payment of dividend into shareholders bank amount.

SOLUTION

Request by shareholder in prescribed form for payment of dividend into shareholders bank amount. – Dividend Mandate

7.Number of days within which payment of dividend be completed by company, after its declaration.

SOLUTION

Number of days within which payment of dividend be completed by company, after its declaration. – 30

8.Dividend declared between two AGMs.

SOLUTION

Dividend declared between two AGMs. – Interim Dividend

9.Dividend decided and declared by the Board.

SOLUTION

Dividend decided and declared by the Board. – Interim Dividend

10.The return paid to the creditors by the company.

SOLUTION

The return paid to the creditors by the company. – Interest

State whether the following statement is true or false.

1.Dividend is paid to registered shareholders of the company.

Options
  • True
  • False

2.Dividend is decided by the Board.

Options
  • True
  • False

3.Dividend is decided by the shareholders.

Options
  • True
  • False

4.Dividend once declared cannot be revoked.

Options
  • True
  • False

5.Dividend cannot be paid out of capital.

Options
  • True
  • False

6.Shareholders decide about the rate and amount of profit to be given as dividend.

Options
  • True
  • False

7.All categories of shareholders get a fixed rate dividend.

Options
  • True
  • False

8.IEPF is the fund created by company.

Options
  • True
  • False

9.Interest is a liability for company.

Options
  • True
  • False

10.Interest is paid to shareholders of company.

Options
  • True
  • False

1.Find the odd one.

Options
  • Final Dividend
  • Interim Dividend
  • Interest

2.Find the odd one.

Options
  • Out of Capital
  • Out of free reserve
  • Out of money given by government

3.Find the odd one.

Options
  • Dividend Account
  • Dividend Mandate
  • unpaid/unclaimed dividend Account

4.Find the odd one.

Options
  • Dividend warrant
  • Dividend Mandate
  • Cheque

Complete the sentence.

1.Word dividend is derived from Latin term ______.

SOLUTION

Word dividend is derived from Latin term Dividendum.

2.Dividend is paid to __________.

SOLUTION

Dividend is paid to shareholders.

3.Dividend can be declared only on recommendation of______.

SOLUTION

Dividend can be declared only on recommendation of Board of Directors

4.Dividend must be paid in______.

SOLUTION

Dividend must be paid in cash.

5.The meeting at which final dividend is approved is ______.

SOLUTION

The meeting at which final dividend is approved is Annual General Meeting (AGM).

6.Dividend cannot be paid out of ______.

SOLUTION

Dividend cannot be paid out of capital.

7.Interim dividend is decided and declared by ______.

SOLUTION

Interim dividend is decided and declared by Board of Directors.

8.Predecided and a fixed rate of dividend is paid to ______.

SOLUTION

Predecided and a fixed rate of dividend is paid to preference shareholders.

9.Payment of dividend must be completed within ______.

SOLUTION

Payment of dividend must be completed within 30 days from the date of declaration.

10.Payment of Interim Dividend needs to be authorized by ______.

SOLUTION

Payment of Interim Dividend needs to be authorized by Articles of Association.

11.The obligatory payment made by company to its creditors is called as ______.

SOLUTION

The obligatory payment made by company to its creditors is called as interest.

1.Select the correct option from the bracket.

Group ‘A’Group ‘B’
a) Dividendum1) ____________
b) Interest2) ____________
c) ____________3) Final Dividend
d) ____________4) Interim Dividend
e) Govt. Fund5) ____________

(Creditors, IEPF, Latin term, At Board Meeting, At AGM)

SOLUTION

Group ‘A’Group ‘B’
a) Dividendum1) Latin Term
b) Interest2) Creditors
c) At AGM3) Final Dividend
d) At Board Meeting4) Interim Dividend
e) Govt. Fund5) IEPF

2.Select the correct option from the bracket.

Group ‘A’Group ‘B’
a) Preference Shares1) ____________
b) Equity Shares2) ____________
c) Deposit holders3) ____________
d) ____________4) Payment of Dividend
e) ____________5) Dividend Declared but not paid/claimed

(Unclaimed/Unpaid Dividend, Fixed rate Dividend, Dividend at a Fluctuating Rate, Interest, Within 30 days)

SOLUTION

Group ‘A’Group ‘B’
a) Preference Shares1) Fixed rate dividend
b) Equity Shares2) Dividend at a fluctuating rate
c) Deposit holders3) Interest
d) Within 30 days4) Payment of Dividend
e) Unclaimed/Unpaid Dividend5) Dividend Declared but not paid/claimed

Answer in one sentence.

1.What is Dividend?

SOLUTION

Dividend is ‘a share in distributable profits of the company to which the shareholder is entitled when it is formally declared by the company.’

2.Who has right to recommend Dividend?

SOLUTION

The Board of Directors have the right to recommend dividend.

3.What is final Dividend?

SOLUTION

The final Dividend is declared and paid after the close of the financial year. It is decided and recommended by the Board of Directors and declared by the shareholders in the AGM.

4.What is Interim Dividend?

SOLUTION

Dividend decided and declared by the Board of Directors between two Annual General Meetings (AGMs) is called Interim Dividend.

5.Who declares Interim Dividend?

SOLUTION

The Board of Directors declares the Interim Dividend.

6.Which shares get dividend at a fixed rate?

SOLUTION

Preference shares get the dividend at a fixed rate.

7.Which shares get dividend at a fluctuating rate?

SOLUTION

Equity shares get dividend at a fluctuating rate.

8.At which Meeting Interim Dividend is decided and declared?

SOLUTION

The Interim Dividend is decided and declared in the Board Meeting.

9.What is Interest?

SOLUTION

Interest is a payment made for using the money of another person. For borrowers, interest is the cost of renting money while for lenders, interest is the income from his lending money.

10.State the time within which Unpaid Dividend be transferred to unpaid dividend Account?

SOLUTION

The Unpaid Dividend must be transferred to the Unpaid Dividend Account within 37 days from the date of its declaration.

Correct the underlined word and rewrite the following sentence.

1.Dividend is paid to creditors.

SOLUTION

Dividend is paid to registered shareholders.

2.Interest is paid to shareholders.

SOLUTION

Interest is paid to creditors.

3.Final Dividend is paid between two AGMs.

SOLUTION

Interim Dividend is paid between two AGMs.

4.Special Resolution must be passed to declare Final Dividend

SOLUTION

Board Resolution and Ordinary Resolution must be passed to declare Final Dividend.

5.Dividend must be paid within 60 days of its declaration.

SOLUTION

Dividend must be paid within 30 days of its declaration.

6.The Dividend to be paid should be transferred to Dividend A/c within 30 days of its declaration.

SOLUTION

The Dividend to be paid should be transferred to Dividend A/c within 5 days of its declaration.

7.Dividend is an obligation to be paid by a company every year.

SOLUTION

Interest is an obligation to be paid by a company every year.

8.Preference shareholders are given the last priority in payment of dividend.

SOLUTION

Equity shareholders are given the last priority in payment of dividend.

9.Preference shareholders get dividend from residual profits.

SOLUTION

Equity shareholders get dividend from residual profits.

10.Dividend is payable every year irrespective of profits made by company.

SOLUTION

Interest is payable every year irrespective of profits made by company.

1.Arrange in Proper Order:

  1. Recommendation of Dividend
  2. Checking sufficiency of profits
  3. Board Meeting

SOLUTION

  1. Checking Sufficiency of Profits
  2. Board Meeting
  3. Recommendation of Profits

2.Arrange in Proper Order:

  1. Transfer to Dividend Account
  2. Transfer to IEPF
  3. Transfer to Unpaid Dividend Account

SOLUTION

  1. Transfer to Dividend Account
  2. Transfer to Unpaid Dividend Account
  3. Transfer to IEPF

3.Arrange in Proper Order:

  1. Closure of Register of Members.
  2. Intimate Stock Exchange of Board Meeting.
  3. Intimate Stock Exchange of declaration of dividend.

SOLUTION

  1. Intimate Stock Exchange of Board Meeting
  2. Intimate Stock Exchange of Declaration of dividend
  3. Closure of Register of Members

4.Arrange in Proper Order:

  1. Decision on Rate of Dividend
  2. Transfer to IEPF
  3. Payment of Dividend.

SOLUTION

  1. Decision on Rate of Dividend
  2. Payment of Dividend
  3. Transfer to IEPF

5.Arrange in Proper Order:

  1. Payment of Interim Dividend
  2. Board meeting deciding and declaring Interim Dividend.
  3. Authorization of Articles of Association.

SOLUTION

  1. Authorization of Articles of Association
  2. Board Meeting deciding and declaring Interim Dividend
  3. Payment of Interim Dividend

Explain the following term/concept.

1.Profit

SOLUTION

Profit is the difference between revenues and the expenses for a given period. Profit making and its maximization is the prime aim of all business organisations. The shareholders invest with an aim of earning returns out of the profits of the company.

2.Dividend

SOLUTION

The term dividend is derived from the Latin word ‘Dividendum’ which means ‘that which is to be divided’. It is that part of the profits of a company which is distributed amongst its shareholders. A dividend is ‘a share in distributable profits of the company to which the shareholder is entitled when it is formally declared by the company.’

3.Interest

SOLUTION

Interest is the price paid for the productive services rendered by capital. It is a charge against the profit of the company. Even if the company makes no profit, interest should be paid. It is payable at a fixed and generally pre-determined.

4.Final Dividend

SOLUTION

Final Dividend is declared and paid after the close of the financial year. It is decided and recommended by the Board of Directors. It is declared by the shareholders in the AGM. It’s declaration does not need authorization by the Articles of Association. It is declared from different sources like; current year’s profits, free reserves, capital profits, Money provided by Govt. for dividend, etc.

5.Interim Dividend

SOLUTION

The dividend declared by the Board of Directors between two Annual General Meetings is called Interim Dividend. The interim dividend is paid in the middle of the accounting year i.e. before the finalisation of annual accounts for the year. The opinion of the company’s Auditors should be taken before declaring Interim Dividend.

6.Unpaid Dividend

SOLUTION

The dividend which is declared by the company but has not been paid by it or claimed by a shareholder within 30 days of its declaration is termed as Unpaid and Unclaimed Dividend. The Unpaid Dividend should be transferred by the company to ‘Unpaid Dividend Account’ opened in a scheduled bank. This transfer should happen within 37 days from the declaration of dividend.

7.Unpaid Dividend Account

SOLUTION

Entire amount of dividend which remains unpaid/unclaimed should be transferred to ‘Unpaid Dividend Account’ opened in a scheduled Bank by the company. The company should transfer this amount within 37 days from the declaration of dividend.

8.Dividend Mandate

SOLUTION

A shareholder may wish to get dividends credited directly to the bank account. In such a case, the shareholder is required to send a request to the company in the prescribed form called ‘Dividend Mandate’. The dividend mandate authorizes the company to pay dividends directly to shareholder’s bankers.

9.IEPF

SOLUTION

IEPF stands for ‘Investors Education and Protection Fund’ and is set up by the central government. Any amount in the Unpaid Dividend Account of a company that remains unpaid/ unclaimed for a period of 7 years from the date of such a transfer shall be, transferred by the company to IEPF.

10.Rate of Dividend.

SOLUTION

A dividend is that part of the profits of a company which is distributed amongst its shareholders. Equity shares are given dividends at a fluctuating rate depending upon the profits of the company. Preference shareholders get dividends at a fixed rate. Also, the rate of interim dividends is lower than the final dividend.

1.Study the following case/situation and express your opinion :

LMN Co Limited decides to declare a dividend for the financial year 2018-19 in which it has earned profits less than their expectations.

  1. Is Board right in recommending a dividend of Rs. 5/- per share out of free reserves?
  2. Can Board declare the dividend though it is not approved by AGM?
  3. Can the Board give dividends in the form of gifts?

SOLUTION

  1. Yes, the Board can recommend a dividend of Rs. 5/- per share out of free reserves. This is because companies are allowed to pay final dividend out of their free reserves.
  2. No, the Board cannot declare the dividend without shareholders’ approval at the AGM. The dividend, as recommended by the Board of Directors, is approved and declared by a resolution passed at the Annual General Meeting by the shareholders.
  3. No, the Board cannot give dividends in the form of gifts. This is because dividends must be paid in cash and not in kind.

2.Study the following case/situation and express your opinion :

ABC Co. Ltd. decides to pay Interim Dividend

  1. Can it be paid out of free reserves?
  2. Is the Board right in declaring the same at the Board Meeting?
  3. Can the company distribute the same within 30 days of its declaration?

SOLUTION

  1. No, Interim Dividends cannot be paid out of free reserves. Interim Dividend is declared out of profits of the current accounting year.
  2. Yes, the Board of Directors has the power to decide and declare the same at the Board Meeting.
  3. Yes, the company should distribute the interim dividend within 30 days of its declaration.

3.Study the following case/situation and express your opinion :

RAJ Company limited decides to pay Interim Dividend

  1. Is the Board justified to decide Interim Dividend of ₹ 5/per share even though profits till date are insufficient?
  2. Can the Board declare it out of Free Reserves?
  3. Can the Board declare it out of Capital?

SOLUTION

  1. No, the Board is not justified to decide the interim dividend of ₹ 5/- per share if the profits till date are insufficient. This is because the Interim Dividend is declared out of profits.
  2. No, the Board cannot declare interim dividends out of Free Reserves.
  3. No, the Board cannot declare the interim dividend out of capital. It is declared out of profits of the current accounting year.

4.Study the following case/situation and express your opinion :

DIAMOND Co. Ltd. is considering to declare Interim Dividend.

  1. In how many days of the declaration it should transfer the funds to Dividend Account?
  2. In how many days it must pay it to shareholders?
  3. In how many days of the declaration it must transfer the funds to the Unpaid Dividend A/c?

SOLUTION

  1. The funds should be transferred to the Dividend Account within 5 days from the date of declaration of interim dividend.
  2. The interim dividend must be paid to the shareholders within 30 days from its declaration.
  3. The unpaid dividend must be transferred to Unpaid Dividend A/c within 37 days from its declaration.

5.Study the following case/situation and express your opinion :

The Board of Directors of STAR Co. Ltd. which is a listed company recommends a dividend of ₹ 15/- per share to be paid in cash.

  1. Is it justified to pay the dividend firstly to its Preference Shareholders and then after to Equity Shareholders?
  2. Is the AGM required to approve the same?
  3. Can the company pay dividend in cash?

Short Note

SOLUTION

  1. Yes, it is justified to pay the Preference shareholders first and then the Equity Shareholders. Preference shareholders are entitled to dividends before it is paid to the equity shareholders as per the terms of the issue of preference shares. Equity shareholders will get dividends from residual profits. i.e. after paying to preference shareholders.
  2. Yes, AGM is required to approve the dividend. The dividend, as recommended by the Board of Directors, is approved and declared by a resolution passed at the Annual General Meeting by the shareholders.
  3. Dividend payable in cash should be paid by cheque or warrant or by electronic mode to the entitled shareholder.

6.Study the following case/situation and express your opinion :

GOLD Co. Ltd. declares a dividend of ₹ 10/- per share for F.Y. 2018-19.

  1. Is the company under default, if the dividend was not paid within 30 days of its declaration?
  2. Is the company right in transferring the unpaid dividend to its Debenture Reserve Account?
  3. Does the company have to transfer the amount of unpaid dividends to IEPF after 30 days?

SOLUTION

  1. Yes, the company is in default if the dividend is not paid within 30 days of its declaration.
  2. No, the company is not right in transferring the unpaid dividend to its Debenture Reserve Account. It should be transferred to the Unpaid Dividend Account. It is a separate bank account opened in a scheduled bank within 5 days of its declaration.
  3. No. Any amount in the Unpaid Dividend Account of a company that remains unpaid/ unclaimed for a period of 7 years from the date of such a transfer shall be, transferred by the company to the Investors Education and Protection Fund (IEPF).

Distinguish between the Following.

1.Final Dividend and Interim Dividend

SOLUTION

PointsFinal DividendInterim Dividend
1. MeaningIt is declared and paid after the close of the financial year.It is declared and paid between two AGMs of an accounting year.
2. Who DeclaresIt is decided and recommended by the Board of Directors. It is declared by the shareholders in the AGM.It is decided and declared by the Board of Directors in the Board Meeting.
3. AuthorizationIt’s declaration does not need authorization by Articles of Association.It can be declared only if Articles of Association permits its declaration.
4. When DeclaredIt is declared at the Annual General Meeting of the company.It is declared between two Annual General Meetings of the company.
5. Rate of DividendRate of final dividend is always higher than Interim Dividend.Rate of Interim dividend is lower than final dividend.
6. SourceIt is declared from different sources like; current year’s profits, free reserves, capital profits, Money provided by Govt. for dividend, etc.It is declared out of profits of the current accounting year.
7. Accounting AspectIt is declared only after the accounts of the year are prepared and finalized.It is declared before the preparation of the final accounts of the company.

2.Dividend and Interest

SOLUTION

PointsDividendInterest
1. MeaningDividend is the return payable to the shareholders of the company for their investment in the share capital.It is the return payable to the creditors of the company viz. Debenture holder/Deposit holders for the loan given by them to the company
2. Given to whomIt is paid to the member i.e. the owners of the company.It is paid to the creditor of the company.
3. ObligationIt is to be paid only when the company has made profits. Therefore no obligation/compulsion to pay dividends.It is not linked to the profits of the company. Payment of interest is an obligation and is to be paid by the company compulsorily.
4. When PayableIt is payable when a company earns sufficient profit in a year after fulfilling all obligations.It is payable every year irrespective of the profits of the company.
5. RateIt is paid at a fluctuating rate to the equity shareholders since it is linked to the profits of the company.The rate of interest is fixed and predetermined at the time of issue of the security
6. ResolutionPayment of Final Dividend requires a Board resolution and an ordinary resolution at the AGM while Interim Dividend can be paid by passing only a Board Resolution.Payment of interest does not require the passing of a resolution at any meeting.
7. Accounting Treatment/AspectA dividend is an appropriation of profit.Interest is a charge on profit.

Answer in brief.

1.State any four points to be kept in mind by a Listed Company with respect to Dividend.

SOLUTION

When a company’s shares are listed in the Stock Exchange, the company has to follow additional requirements with respect to listings agreements. They are as follows:

  1. Notify the stock exchange where the company’s securities are listed at least 2 days in advance of the date of the Board meeting held to consider the recommendation of the final dividend.
  2. Intimate Stock Exchange immediately about the declaration of the dividend after the Board Meeting.
  3. Give notice of Book closure to the stock exchange at least 7 working days before the closure.
  4. Close the Register of members and the Transfer Register.
  5. It must use an electronic mode of payment such as Electronic Clearing Services (ECS) or National Electronic Fund Transfer (NEFT); as approved by the Reserve Bank of India (RBI).
  6. The listed company has to express the dividend on a per-share basis only.

2.Discuss any four features of dividend.

SOLUTION

  1. It is the portion of the profits of the company paid to its shareholders.
  2. It is payable out of the profits of the company.
  3. A dividend is an unconditional payment made by the company.
  4. The company can pay dividends only to the shareholders viz. (1) Equity (2) Preference.
  5. If the company has issued equity shares with differential rights as to dividend, the terms of issue of such shares will govern the rights of shareholders about receiving the dividend.
  6. Dividends cannot be declared out of capital.
  7. Dividends can be declared only on recommendation of the Board of Directors.
  8. The dividend, as recommended by the Board of Directors, is approved and declared by a resolution passed at the Annual General Meeting by the shareholders.
  9. Dividend for any previous year cannot be declared once that year’s Annual Account has been approved in the AGM.
  10. Dividend once approved and declared by shareholders creates a debt. It cannot be revoked.
  11. The dividend includes Interim Dividend.
  12. The dividend must be paid in cash and not in kind.
  13. The dividend is to be paid on the paid-up value of shares.
  14. Dividends cannot be paid on calls paid in advance.

3.Explain the features of Interest.

SOLUTION

  1. Interest is the price paid for the productive services rendered by capital.
  2. It is directly related to risk. The higher the risk, the higher is the interest.
  3. Rate of Interest is expressed as an annual percentage of Principal.
  4. The rate of interest is determined by various factors like money supply, fiscal policy, the volume of borrowings, rate of inflation, etc.
  5. Interest is a charge against the profit of the company. Even if the company makes no profit, interest should be paid.
  6. It is payable at a fixed and generally pre-determined rate. The company has to pay interest if it has borrowed money from creditors like Debentures holders, Depositors, Bondholders, etc.

Justify the following statement.

1.Dividend is paid out of profits of the company.

SOLUTION

  1. Shareholders invest in the company’s shares with aim of earning returns out of the profits of the company.
  2. The shareholders get dividends as a return on their investment.
  3. The shareholder being the owner of the company is entitled to a share in the company’s profits.
  4. A dividend is a share of the distributable profits of the company.
  5. Hence, the dividend is paid out of the profits of the company.

2.Interim dividend cannot be paid out of free reserves.

SOLUTION

  1. A dividend declared by the Board of Directors between two AGMs is called an Interim Dividend.
  2. The interim dividend is paid in the middle of the accounting year.
  3. It is paid before the finalisation of annual accounts for the year.
  4. Free Reserves are the reserves available for distribution of profits as per the latest audited Balance Sheet of the Company.
  5. It is declared out of profits of the current accounting year.
  6. Hence, Interim Dividend cannot be paid out of free reserves.

3.AGM is crucial for Final Dividend.

SOLUTION

  1. The final dividend is declared and paid after the close of the financial year.
  2. It is decided and recommended by the Board of Directors.
  3. Dividend as recommended by the Board of Directors is approved and declared by a resolution passed at the Annual General Meeting (AGM).
  4. The final dividend is declared by the shareholders in the AGM.
  5. Thus, AGM is crucial for the Final Dividend.

4.Listed Company has to follow additional guidelines on dividend matters.

SOLUTION

A dividend is ‘a share in distributable profits of the company to which the shareholder is entitled when it is formally declared by the company.’ The Board of Directors have the right to recommend a dividend. Once the dividend is approved and declared by the shareholders, it becomes a debt and cannot be revoked by the company. The final Dividend is declared and paid after the close of the financial year. It is decided and recommended by the Board of Directors and declared by the shareholders in the AGM.

5.Equity shares get last priority in dividend.

SOLUTION

  1. A dividend is a share in the distributable profits of the company to which the shareholder is entitled when it is formally declared by the company.
  2. The dividend is payable only to the registered shareholders of the company.
  3. Preference shareholders are entitled to dividends before it is paid to the equity shareholders as per the terms of the issue of preference shares.
  4. Equity shareholders will get dividends from residual profits. i.e. after paying to preference shareholders and arrears of dividend on cumulative preference shares.
  5. This Equity shares get the last priority in dividends.

6.Unpaid dividend cannot be used by the company.

SOLUTION

  1. The dividend which is declared by the company but has not been paid by it or claimed by a shareholder within 30 days of its declaration is termed as Unpaid and Unclaimed Dividend.
  2. The company has to transfer it to an Unpaid Dividend Account opened in a scheduled bank within 37 days from the declaration of dividend.
  3. The company has to put up the details of the unpaid dividend on a website within 90 days of the transfer of the amount in the ‘Unpaid Dividend Account’.
  4. Any amount in the Unpaid Dividend Account that remains unpaid/unclaimed for a period of 7 years should be transferred by the company to the ‘Investors Education and Protection Fund’ (IEPF).
  5. Thus, a company cannot use the Unpaid Dividend.

7.Interest is a liability/obligation of the company.

SOLUTION

  1. Interest is the price paid for the capital borrowed by the company.
  2. Interest is a charge against the profit of the company.
  3. Even if the company makes no profit, interest should be paid.
  4. It is payable at a fixed and generally pre-determined rate
  5. The company is obligated to pay interest if it has borrowed money from creditors like debenture-holders, Depositors, Bondholders, etc.
  6. Thus, interest is a liability/obligation of the company.

8.Approval of members is not needed for Interim Dividend.

SOLUTION

  1. A dividend declared by the Board of Directors between two AGMs is called an Interim Dividend.
  2. The interim dividend is paid in the middle of the accounting year i.e. before the finalisation of annual accounts for the year.
  3. Articles of Association of the company must authorize the Board of Directors to declare Interim Dividend.
  4. The Board Meeting has to pass a resolution for declaring the Interim Dividend.
  5. Thus, the approval of members is not needed for the interim dividend.

Answer the following question.

1.Define Dividend and explain its features.

SOLUTION

Meaning:

  1. Term ‘Dividend’ is derived from the Latin word ‘Dividendum’ which means ‘that which is to be divided’.
  2. It is a part of the profits of the company that is distributed among the shareholders of the company.
  3. A dividend is ‘a share in distributable profits of the company to which the shareholder is entitled when it is formally declared by the company.’
  4. Usually, the term ‘Dividend’ refers to the Annual/final Dividend unless it is specifically mentioned as an Interim Dividend.

Definition:

  1. The Institute of Chartered Accountants of India (ICAI) has defined Dividend as, “a distribution to shareholders out of profits or reserves available for this purpose.”
  2. The Supreme Court has defined it as, “In case of going concern, it means portion of profits of a company, which is allotted to the holders of shares in a company.”

Features:

  1. It is the portion of the profits of the company paid to its shareholders.
  2. It is payable out of the profits of the company.
  3. A dividend is an unconditional payment made by the company.
  4. The company can pay dividends only to the shareholders viz. Equity and Preference.
  5. If the company has issued equity shares with differential rights as to dividend, the terms of issue of such shares will govern the rights of shareholders about receiving the dividend.
  6. The dividend cannot be declared out of capital.
  7. The dividend can be declared only on the recommendation of the Board of Directors.
  8. The dividend, as recommended by the Board of Directors, is approved and declared by a resolution passed at the Annual General Meeting by the shareholders.
  9. Dividend for any previous year cannot be declared once that year’s Annual Account has been approved in the AGM.
  10. Dividend once approved and declared by shareholders creates a debt. It cannot be revoked.
  11. The dividend includes Interim Dividend.
  12. The dividend must be paid in cash and not in kind.
  13. The dividend is to be paid on the paid-up value of shares.
  14. The dividend cannot be paid on calls paid in advance.

2.What is Interest? Explain its features.

SOLUTION

Meaning:

  • Interest is a payment made for using the money from another person.
  • The borrower takes money from the lender. Thus, for borrowers, interest is the cost of renting money and for the lender, interest is the income from his lending money.
  • The company has to pay interest if it has borrowed money from creditors like Debentures holders, Depositors, Bondholders, etc.

Features:

  1. Interest is the price paid for the productive services rendered by capital.
  2. It is directly related to risk. The higher the risk, the higher is the interest.
  3. Rate of Interest is expressed as an annual percentage of Principal.
  4. The rate of interest is determined by various factors like money supply, fiscal policy, the volume of borrowings, rate of inflation, etc.
  5. Interest is a charge against the profit of the company. Even if the company makes no profit, interest should be paid.
  6. It is payable at a fixed and generally pre-determined rate.

3.Discuss legal provisions for declaration of dividend.

SOLUTION

1) Board Meeting: Dividend can be declared only on the recommendation of the Board of Directors. Board Meeting should be called to pass a resolution about:

  1. Rate of Dividend and amount of Dividend to be paid
  2. Book closure date for the dividend
  3. Date of Annual General Meeting.
  4. Bank with which a separate account should be opened to remit the dividend amount.

2) Shareholders Approval:

  1. The dividend is approved by shareholders by passing an Ordinary Resolution at the Annual General Meeting.
  2. Shareholders can declare a lower rate of dividend than what is recommended by the Board but not higher than that.
  3. Once the dividend is declared at the General meeting it cannot be revoked. The company is not permitted to declare it a second time in that year.

3) Separate Bank Account: The company must deposit the dividend amount in a separate bank account opened in a scheduled bank called a Dividend Account within 5 (Five) days of its declaration.

  • Listed company: Where a company’s shares are listed on the Stock Exchanges, additional requirements with respect to Listings agreements must be followed.
  1. Notify stock exchange where the company’s securities are listed at least 2(two) days in advance of the date of the meeting of the Board at which recommendation of the final dividend is to be considered.
  2. Intimate Stock Exchange immediately about the declaration of the dividend after the Board Meeting.
  3. Give notice of Book closure to the stock exchange at least 7(seven) working days before the closure.
  4. Close the Register of members and the Transfer Register.
  5. It must use an electronic mode of payment such as Electronic Clearing Services (ECS) or National Electronic Fund Transfer (NEFT); as approved by the Reserve Bank of India (RBI)
    1) Book closure: It means the time period when the company does not handle any adjustments to the Register or requests to transfer Shares.
    2) Record Date: It is the cut-off date for determining the number of registered members who are eligible for corporate benefits like Dividends and Bonus shares.
  6. The listed company has to express the dividend on a per-share basis only.

4) Prohibition to Pay Dividend:

  1. A company that has failed to repay deposit or any interest on deposit cannot declare any dividend on its equity shares.
  2. No dividend can be declared if the company has defaulted on :
    1) Redemption of Debentures or payment of interest, Redemption of Preference shares, payment of interest to the financial institution, etc.

4.Explain Interim Dividend.

SOLUTION

Meaning:

  1. The dividend which is declared by the Board of Directors between two Annual General Meetings is called Interim Dividend.
  2. The interim dividend is paid in the middle of the accounting year i.e. before the finalization of annual accounts for the year.
  3. The opinion of the company’s Auditors should be taken before declaring an Interim Dividend.

Features:

  1. It is only payment on account of the whole dividend for the year.
  2. The company should provide depreciation for the entire year and not proportionately for a part of the year before declaring an Interim Dividend.
  3. The interim dividend cannot be paid out of any reserves.
  4. The Board of Directors has the power to declare an Interim Dividend.
  5. Articles of Association of the company must authorize the Board of Directors to declare Interim Dividend.
  6. The Board Meeting has to pass a resolution for declaring the Interim Dividend.
  7. The amount to be given as Interim Dividend must be credited in a separate Bank account in a scheduled bank within 5 days of its declaration.
  8. Interim Dividend should be paid within 30 days of its declaration.
  9. Unpaid/Unclaimed Interim Dividend should be transferred to ‘Unpaid Dividend Account’ within 7 days of the expiry of 30 days of declaration i.e. 37 days of its declaration.
  10. Any amount remaining unpaid/unclaimed in the ‘Unpaid Dividend A/c’ for 7 years should be transferred to IEPF.

                                             COMPLETED


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