Question

The paid-up capital of Mukund Ltd. is Rs $18,00,000$. The company decided to propose a dividend of Rs $2,16,000$ out of current profit. How much of current profit is to be transferred to reserve?

• A. At least $2.5$ $\%$
• B. At least $5$ $\%$
• C. At least $10$ $\%$
• D. None of the above

Answer 1

The correct option is A At least $2.5$ $\%$

As per the provision of sub section (2) of section 205 of the companies act, no dividend can be declared or paid by the company to its shareholders out of the profits of the company for the financial year after providing depreciation until a specified percentage of profit of the financial year is transferred to reserves.

Rules are as under:

• If proposed dividend exceeds 10% but less than 12.5% of the paid up capital, an amount of 2.5% of the current profit need to be transferred to reserve.
• If proposed dividend exceeds 12.5% but less than 15% of the paid up capital, an amount of 5% of the current profit need to be transferred to reserve.
• If proposed dividend exceeds 15% but less than 20% of the paid up capital, an amount of 7.5% of the current profit need to be transferred to reserve.
• If proposed dividend exceeds 20% of the paid up capital, an amount of 10% of the current profit need to be transferred to reserve.

In present case dividend percentage is 12% (216000/1800000), falls under first rule, hence 2.5% need to be transferred to reserves from current year's profit.