Following information are available in respect of Z Limited as on 31st March, 2024 1. Equity shares of 100 each 500 lakhs 2. General Reserve 100…

In case of declaration of dividend out of free reserves, there are 3 conditions: (1) Dividend Rate < Average Rate of last 3 years 10% < 12% [(12+14+10)/3] Condition is Satisfied (2) Dividend Distributed < 10% of PUSC + Reserve and Surplus 50,00,000 < 59,50,000 [(5,00,00,000 + 1,00,00,000 – 5,00,000) × 10%] Condition is Satisfied (3) Reserves after dividend > 15% of PUSC 45,00,000 not > 75,00,000 (5,00,00,000 × 15%) Condition is Not Satisfied (4) The closing balance of reserves after payment of dividend and set off of loss = 75,00,000 Therefore, can be utilized = 20,00,000 (1,00,00,000 – 5,00,000 – 75,00,000) Thus, rate of dividend = (20,00,000/5,00,00,000) = 4% Alternatively To judge the recommendation of management, the satisfaction of all three conditions is to be checked: (1) Condition I The proposed dividend of 10% is less than the average rate of dividend being 12% (i.e.) (12+14+10) /5 =12 %. Hence, this condition is satisfied. (2) Condition II Amount to be withdrawn. 10% dividend on Equity share capital 50,00,000 + Loss of Current year 5,00,000 Amount to be drawn from General Reserve 55,00,000 Maximum amount that can be withdrawn should not exceed 10% of paid-up share capital + free reserves. = 10% of [500lakhs +100 lakhs] = 60,00,000 As the amount to be withdrawn is within the maximum limit, hence, this condition is also satisfied. (3) Condition III Balance of reserves after withdrawal (100-55) ₹ 45,00,000 15% of paid-up capital - 75,00,000 As the balance of reserves should not be less than 15% of its paid-up share capital, but here the balance of reserves after withdrawal is less than 15% of paid-up share capital, hence this condition is not satisfied, hence, 10% dividend cannot be declared. Maximum withdrawal of Reserve if condition II is satisfied. Opening balance of Reserves in the beginning of the year = 1,00,00,000 - Closing balance of reserves being 15% of paid-up capital = 75,00,000 Reserves available = 25,00,000 Maximum permissible Divisible Profits Permissible withdrawal as above = 25,00,000 Less: Current Year's Loss = 5,00,000 Maximum permissible Divisible profit = 20,00,000 Actual permissible rate of Dividend = (₹ 20,00,000 /5,00,00,000) x 100 = 4% Therefore, the recommendation of management is not justified and a dividend only up to a rate of 4% can be declared.