Question

Dividends are paid from:

• A. Capital reserve
• B. Share capital
• C. Company profits
• D. Authorized capital
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Hint:

Paying dividends from share capital is illegal because it would return capital to shareholders under the guise of earnings, reducing the security of creditors.

Answer 1

The Correct Option is C

Step 1: Defining Dividends:
Dividends are cash distributions paid by a company to its shareholders from its earnings, as recommended by the Board of Directors.

Step 2: Evaluating Capital Accounts:

• Capital Reserve (A): Retains profits from capital transactions and cannot be used for cash dividends.
• Share Capital (B) Authorized Capital (D): Represent the company's core equity base. Paying dividends from these accounts would deplete the company's capital, which is prohibited by law.

Step 3: Locating the Source of Dividends:
Under corporate law, dividends must be paid out of current-year profits after tax or accumulated retained earnings. Therefore, dividends are paid from Company profits (C).