Question

Capital reserves are normally created out of free of distributable profits.

• A. True
• B. False

Answer 1

The correct option is B False

Capital reserves are those reserves which are not created out of operating profits. Capital reserves refers to the amounts which are not free for distribution by way of dividend.. In case of companies, following are examples of capital reserves :

• Profit prior to incorporation.
• Premium on the issue of shares and debentures.
• Profit on reissue of forfeited shares.
• Profit on redemption of debentures.
• Profit on sale of fixed assets.
• Profit on revaluation of fixed assets.
• Profit on a sale of the whole undertaking or a part of it.