Day: May 8, 2020

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:

1. 10%
2. 20%
3. 40%
4. 60%

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 3

1. Not correct
2. Not correct
3. Correct
4. 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.

 

This work is licensed under a Creative Commons Attribution 4.0 International License.