A company wishes to pay the maximum possible ordinary dividend in respect of a year during which it earned a net profit after tax of £26,600.
The company has issued 20.000 £1 8% preference shares and 50,000 £1 ordinary shares.
If £5,000 is to be transferred to the general reserve, what ordinary dividends are to be paid, in percentage terms?
Select ONE answer:
- 10%
- 20%
- 40%
- 60%
Show your workings to arrive at your answer, and explain and justify your reasons:
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This multiple-choice question is suitable for Accounting KS5 classes.
The answer is 3
- Not correct
- Not correct
- Correct
- Not correct
Answer 3
Profit after tax £26,600
Preference dividend (£20000 * 8%) – £1,600
£25,000
Transfer to general reserve – £5,000
Profit available to pay ordinary dividend £20,000
As £20,000 is available for the payment of the dividend on the ordinary shares and the company wishes to pay the maximum possible dividend, £20,000 will be paid.
£20.000 dividend / £50,000 issued ordinary share capital = 40% ordinary dividend.
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