Maharashtra Board Class 12 Secretarial Practice Chapter 10 Dividend and Interest Solutions

Dividend And Interest 12th Secretarial Practice Chapter 10 Solutions Maharashtra Board

Class 12 Secretarial Practice Chapter 10 Exercise Solutions

Exercise 1A. Select the correct answer from the options given below and rewrite the statements.

Question 1.Dividend is paid to __________
(a) Shareholder
(b) Debenture holder
(c) Depositor
Answer: (a) Shareholder
In simple words: Dividends are a share of company profits distributed to its owners, who are the shareholders.

🎯 Exam Tip: Remember that dividends are strictly for shareholders as a return on their investment.

 

Question 2.__________ is profit shared by company with a shareholder.
(a) Interest
(b) Rent
(c) Dividend
Answer: (c) Dividend
In simple words: A dividend is the portion of a company's earnings that is paid out to its shareholders as a return on their investment.

🎯 Exam Tip: Understand the definition of dividend as a share of profit for shareholders.

 

Question 3.Dividend is recommended by __________
(a) Managing Director
(b) Secretary
(c) Board of Directors
Answer: (c) Board of Directors
In simple words: The company's Board of Directors initially proposes or suggests the dividend payment.

🎯 Exam Tip: Distinguish between recommendation (Board) and declaration/approval (Shareholders for final dividend).

 

Question 4.Interim Dividend is declared by __________
(a) Board of Directors
(b) Debenture holders
(c) Depositors
Answer: (a) Board of Directors
In simple words: An interim dividend is declared by the Board of Directors mid-financial year, without needing shareholder approval first.

🎯 Exam Tip: Note that interim dividends are a special case declared solely by the Board.

 

Question 5.Final Dividend is declared by __________
(a) Board of Directors
(b) Shareholders
(c) Depositors
Answer: (b) Shareholders
In simple words: The final dividend is formally approved and declared by the company's shareholders at their Annual General Meeting.

🎯 Exam Tip: Shareholders approve the final dividend, often based on the Board's recommendation.

 

Question 6.Dividend cannot be declared out of __________
(a) Capital
(b) Profit
(c) Reserves
Answer: (a) Capital
In simple words: A company cannot use its core capital to pay dividends; dividends must come from profits or reserves.

🎯 Exam Tip: Always remember that dividends are paid from profits, not from the company's capital base.

 

Question 7.Dividend amount should be transferred in a separate Bank Account within __________ days of its declaration.
(a) 5
(b) 15
(c) 50
Answer: (a) 5
In simple words: After declaring a dividend, the company must transfer the dividend amount to a special bank account within five days.

🎯 Exam Tip: The 5-day rule for transferring dividend funds to a separate account is a key compliance requirement.

 

Question 8.Dividend should be paid within __________ days of its declaration.
(a) 3
(b) 13
(c) 30
Answer: (c) 30
In simple words: Once a dividend is declared, the company is legally required to pay it to shareholders within a month.

🎯 Exam Tip: The 30-day payment timeline for dividends is a critical regulatory period.

 

Question 9.__________ holders get dividend from residual profits.
(a) Equity share
(b) Preference share
(c) Debenture
Answer: (a) Equity Share
In simple words: Equity shareholders receive dividends from the company's remaining profits after all other obligations, including preference dividends, have been met.

🎯 Exam Tip: Equity shareholders are residual claimants, receiving dividends after preference shareholders.

 

Question 10.Dividend is paid first to __________ shareholders.
(a) Equity
(b) Preference
(c) Deferred
Answer: (b) Preference
In simple words: Preference shareholders have priority over equity shareholders in receiving their dividend payments.

🎯 Exam Tip: Understand the preferential right of preference shareholders regarding dividend payment.

 

Question 11.__________ warrant is a cheque containing dividend amount sent by company to the shareholders.
(a) Dividend
(b) Share
(c) Interest
Answer: (a) Dividend
In simple words: A dividend warrant is essentially a cheque issued by the company to pay dividends to its shareholders.

🎯 Exam Tip: Know the common methods of dividend payment, such as dividend warrants or electronic transfers.

 

Question 12.IEPF is created by __________ where unpaid dividend is transferred by company.
(a) Central Government
(b) Company
(c) Shareholders
Answer: (a) Central Government
In simple words: The IEPF (Investors Education and Protection Fund) is established by the Central Government to which unpaid dividends are transferred after a certain period.

🎯 Exam Tip: The IEPF plays a crucial role in managing unclaimed dividends and investor protection.

 

Question 13.Payment of __________ Dividend must be authorised by the Articles of Association.
(a) Interim
(b) Final
(c) Bonus
Answer: (a) Interim
In simple words: For a company to pay an interim dividend, its Articles of Association must contain a provision authorizing such a payment.

🎯 Exam Tip: The Articles of Association are vital for authorizing interim dividend payments.

 

Question 14.__________ is a return paid to creditors by the company.
(a) Dividend
(b) Interest
(c) Rent
Answer: (b) Interest
In simple words: Interest is the payment a company makes to its creditors for borrowing money, unlike dividends paid to owners.

🎯 Exam Tip: Clearly differentiate interest (for creditors) from dividends (for shareholders).

 

Question 15.__________ is not linked to profits of the company.
(a) Dividend
(b) Interest
(c) Bonus
Answer: (b) Interest
In simple words: Interest payments are a fixed obligation for a company, regardless of whether it makes a profit or not.

🎯 Exam Tip: Interest is a fixed charge against profits, whereas dividends are an appropriation of profits.

 

Exercise 1B. Match the pairs.

Question (I).

Group 'A'	Group 'B'
(a) Dividend	(1) Equity Shareholders
(b) Interest	(2) Appropriation of Profit
(c) Interim Dividend	(3) Recommendation of Secretary
(d) Final Dividend	(4) Registrar of Company
(e) Fluctuating Rate of Dividend	(5) Obligatory to pay
	(6) Decided and Declared by the Board of Directors
	(7) Decided by Board and Declared by Members
	(8) Decided by President of India
	(9) Company not allowed to pay
	(10) Declared by Government of India

Answer:

Group 'A'	Group 'B'
(a) Dividend	(2) Appropriation of Profit
(b) Interest	(5) Obligatory to pay
(c) Interim Dividend	(6) Decided and Declared by the Board of Directors
(d) Final Dividend	(7) Decided by Board and Declared by Members
(e) Fluctuating Rate of Dividend	(1) Equity Shareholders

In simple words: Dividends are an appropriation of profit, interest is an obligatory payment, interim dividends are declared by the Board, final dividends are decided by the Board and declared by members, and fluctuating dividends are for equity shareholders.

🎯 Exam Tip: Understand the nature and authority behind each financial term and its corresponding action or recipient.

 

Question (II).

Group 'A'	Group 'B'
(a) Dividend	(1) Inform stock exchange about dividend declaration
(b) Interest	(2) Creditors
(c) IEPF	(3) Registered Shareholders
(d) Unpaid Dividend Account	(4) Balance of Unpaid Dividend Transferred
(e) Listed Company	(5) Unregistered Company
	(6) Non-listed company
	(7) Unpaid/Unclaimed Dividend
	(8) Balance of unpaid bonus transferred here
	(9) Must inform the government about dividend declaration
	(10) General Public

Answer:

Group 'A'	Group 'B'
(a) Dividend	(3) Registered Shareholders
(b) Interest	(2) Creditors
(c) IEPF	(4) Balance of Unpaid Dividend Transferred
(d) Unpaid Dividend Account	(7) Unpaid/Unclaimed Dividend
(e) Listed Company	(1) Inform stock exchange about dividend declaration

In simple words: Dividends are paid to registered shareholders, interest to creditors, IEPF receives unpaid dividend balances, the Unpaid Dividend Account holds unclaimed dividends, and listed companies must inform the stock exchange about dividend declarations.

🎯 Exam Tip: Understand the specific recipients, funds, and regulatory requirements associated with dividends and interest.

 

Exercise 1C. Write a word or term or a phrase that can substitute each of the following statements.

Question 1.The return on investment is paid to the shareholders of the company.
Answer: Dividend
In simple words: The distribution of a company's profits to its shareholders as a reward for their investment is known as a dividend.

🎯 Exam Tip: Understand dividend as the primary return for shareholders.

 

Question 2.The meeting where the final dividend is declared.
Answer: AGM (Annual General Meeting)
In simple words: The Annual General Meeting (AGM) is the mandatory yearly meeting where shareholders formally approve the final dividend.

🎯 Exam Tip: The AGM is a key event for major company decisions, including final dividend declaration.

 

Question 3.The company has to intimate the stock exchange about the declaration of dividends.
Answer: Listed company
In simple words: A company whose shares are publicly traded on a stock exchange is called a listed company and has reporting obligations.

🎯 Exam Tip: Listed companies have greater transparency requirements due to public investment.

 

Question 4.The shareholders get dividends at a fixed rate.
Answer: Preference
In simple words: Preference shareholders receive a dividend at a predetermined, consistent rate, unlike equity shareholders whose dividends fluctuate.

🎯 Exam Tip: Fixed rate dividends are a defining characteristic of preference shares.

 

Question 5.The shareholders get dividends at a fluctuating rate.
Answer: Equity
In simple words: Equity shareholders receive dividends that vary, depending on the company's profitability and the board's decision each year.

🎯 Exam Tip: Equity shareholders bear higher risk but also have the potential for higher, fluctuating returns.

 

Question 6.Request by the shareholder in the prescribed form for payment of dividend into shareholders bank amount.
Answer: Dividend Mandate
In simple words: A Dividend Mandate is a formal instruction from a shareholder to the company to directly credit their dividend payments into their bank account.

🎯 Exam Tip: Dividend mandates simplify payment and ensure direct credit to the shareholder's bank.

 

Question 7.The number of days within which payment of dividend be completed by the company after its declaration.
Answer: 30 days
In simple words: Companies are legally required to complete dividend payments within 30 days of their declaration.

🎯 Exam Tip: The 30-day rule for dividend payment is a crucial regulatory deadline.

 

Question 8.Dividend declared between two AGMs.
Answer: Interim Dividend
In simple words: A dividend paid out by the company's board of directors between two annual general meetings is known as an interim dividend.

🎯 Exam Tip: Interim dividends provide shareholders with earlier returns during a financial year.

 

Question 9.Dividend decided and declared by the Board.
Answer: Interim Dividend
In simple words: The company's Board of Directors has the full authority to both decide and declare an interim dividend.

🎯 Exam Tip: Understand the board's unique power in relation to interim dividends.

 

Question 10.The return is paid to the creditors by the company.
Answer: Interest
In simple words: Companies pay interest to their creditors as a cost for borrowing money, which is different from dividends paid to owners.

🎯 Exam Tip: Interest is a finance cost for borrowed capital, unlike dividends which are a distribution of profit.

 

Exercise 1D. State whether the following statements are True or False.

Question 1.The dividend is paid to registered shareholders of the company.
Answer: True
In simple words: Only shareholders whose names are officially recorded in the company's books are eligible to receive dividends.

🎯 Exam Tip: Eligibility for dividends is strictly tied to registration in the company's records.

 

Question 2.The dividend is decided by the Board.
Answer: True
In simple words: The Board of Directors proposes or decides the rate of final dividend and declares interim dividends.

🎯 Exam Tip: While the Board decides, the final dividend still needs shareholder approval.

 

Question 3.The dividend is decided by the shareholders.
Answer: False
In simple words: While shareholders approve the *final* dividend, the initial decision and recommendation usually come from the Board of Directors.

🎯 Exam Tip: Distinguish between the Board's recommendation and shareholders' approval in the dividend process.

 

Question 4.Dividend once declared cannot be revoked.
Answer: True
In simple words: Once a final dividend is legally declared by the shareholders, it becomes a debt of the company and cannot be cancelled.

🎯 Exam Tip: A declared dividend creates a binding financial obligation for the company.

 

Question 5.Dividend cannot be paid out of capital.
Answer: True
In simple words: Companies are prohibited from distributing their core capital as dividends; payments must come from profits or accumulated reserves.

🎯 Exam Tip: It's a fundamental principle that dividends are paid from earnings, not from the company's foundational capital.

 

Question 6.Shareholders decide about the rate and amount of profit to be given as dividends.
Answer: False
In simple words: The Board of Directors recommends the dividend rate, and shareholders can only approve it or declare a lower rate, not a higher one.

🎯 Exam Tip: Shareholders approve the dividend but cannot unilaterally increase the recommended rate.

 

Question 7.All categories of shareholders get a fixed-rate dividend.
Answer: False
In simple words: Only preference shareholders typically receive a fixed rate of dividend, while equity shareholders receive a fluctuating rate.

🎯 Exam Tip: Differentiate between the fixed dividend for preference shares and variable dividend for equity shares.

 

Question 8.IEPF is the fund created by the company.
Answer: False
In simple words: The IEPF (Investors Education and Protection Fund) is created and managed by the Central Government, not by individual companies.

🎯 Exam Tip: The IEPF is a government initiative for investor protection, not a company-specific fund.

 

Question 9.Interest is a liability for the company.
Answer: True
In simple words: Interest is a financial obligation or debt that a company must pay to its lenders or creditors.

🎯 Exam Tip: Liabilities represent obligations that must be settled, and interest falls into this category.

 

Question 10.Interest is paid to shareholders of the company.
Answer: False
In simple words: Interest is paid to creditors (like debenture holders or banks) for borrowed funds, whereas dividends are paid to shareholders.

🎯 Exam Tip: Be clear on who receives interest (creditors) versus who receives dividends (shareholders).

 

Exercise 1E. Find the odd one.

Question 1.Final Dividend, Interim Dividend, Interest
Answer: Interest
In simple words: Interest is a payment to creditors for borrowed money, while Final Dividend and Interim Dividend are distributions of profit to shareholders.

🎯 Exam Tip: Group similar financial distributions; dividends are returns to owners, interest is cost of debt.

 

Question 2.Out of Capital, Out of free reserve, Out of money given by the government
Answer: Out of Capital
In simple words: Dividends can be paid from free reserves or government grants, but legally, they cannot be paid from the company's core capital.

🎯 Exam Tip: Understand the legal sources from which dividends can and cannot be paid.

 

Question 3.Dividend Account, Dividend Mandate, Unpaid/ Unclaimed Dividend Account
Answer: Dividend Mandate
In simple words: A Dividend Mandate is an instruction for payment, whereas Dividend Account and Unpaid/Unclaimed Dividend Account are specific bank accounts used for handling dividend funds.

🎯 Exam Tip: Distinguish between payment instructions and actual financial accounts.

 

Question 4.Dividend warrant, Dividend Mandate, Cheque
Answer: Dividend Mandate
In simple words: A Dividend Mandate is an instruction for payment, while a Dividend Warrant and a Cheque are actual instruments for making payments.

🎯 Exam Tip: Identify the operational documents versus the instruction for payment.

 

Exercise 1F. Complete the sentences.

Question 1.Word dividend is derived from Latin term __________
Answer: Dividendum
In simple words: The term 'dividend' originates from the Latin word 'Dividendum,' which means "that which is to be divided."

🎯 Exam Tip: Knowing the etymology can help reinforce the core meaning of the term.

 

Question 2.Dividend is paid to __________
Answer: registered shareholders
In simple words: Dividends are distributed exclusively to individuals or entities whose names are recorded in the company's official register of shareholders.

🎯 Exam Tip: Emphasize the requirement of being a 'registered' shareholder for dividend eligibility.

 

Question 3.Dividend can be declared only on recommendation of __________
Answer: Board of Directors
In simple words: The Board of Directors must first propose or suggest the dividend payment before it can be formally declared.

🎯 Exam Tip: The Board's recommendation is a crucial preliminary step in the dividend declaration process.

 

Question 4.Dividend must be paid in __________
Answer: cash
In simple words: Dividends are typically disbursed as monetary payments, usually through cash or electronic transfers, not in kind.

🎯 Exam Tip: Dividends are a cash distribution of profits, not typically given as goods or services.

 

Question 5.The meeting at which final dividend is approved is __________
Answer: Annual General Meeting
In simple words: The formal approval for a final dividend takes place at the company's Annual General Meeting, where shareholders vote on the proposal.

🎯 Exam Tip: The AGM is the specific forum for shareholder approval of final dividends.

 

Question 6.Dividend cannot be paid out of __________
Answer: capital
In simple words: A company is legally barred from using its fundamental capital base to fund dividend payments.

🎯 Exam Tip: Reinforce the rule that dividends originate from profits or reserves, protecting the company's capital.

 

Question 7.Interim dividend is decided and declared by __________
Answer: Board of Directors
In simple words: The Board of Directors has the full authority to both determine and announce an interim dividend without immediate shareholder approval.

🎯 Exam Tip: The Board's power to declare interim dividends is distinct from the final dividend process.

 

Question 8.Predecided and a fixed rate of dividend is paid to __________
Answer: preference shareholder
In simple words: Preference shareholders receive dividends at a specific, unchanging rate that is agreed upon in advance.

🎯 Exam Tip: Highlight the characteristic of 'fixed rate' for preference shareholders.

 

Question 9.Payment of dividend must be completed within __________
Answer: 30 days
In simple words: Companies are required to ensure that all dividend payments are fully disbursed within one month of their official declaration.

🎯 Exam Tip: The 30-day window is a strict regulatory compliance for dividend payments.

 

Question 10.Payment of Interim Dividend needs to be authorized by __________
Answer: Articles of Association
In simple words: The company's Articles of Association must explicitly grant the power to the board to declare interim dividends.

🎯 Exam Tip: The Articles of Association serve as the legal foundation for the board's authority on interim dividends.

 

Question 11.The obligatory payment made by company to its creditors is called as __________
Answer: Interest
In simple words: The mandatory payment a company makes for borrowing money from its creditors is termed as interest.

🎯 Exam Tip: Clearly distinguish between obligatory payments (interest to creditors) and profit distribution (dividends to shareholders).

 

Exercise 1G. Select the correct option from the bracket.

Question 1.

Group 'A'	Group 'B'
(a) Dividendum	(1) __________
(b) Interest	(2) __________
(c) __________	(3) Final Dividend
(d) __________	(4) Interim Dividend
(e) Government Fund	(5) __________

(Latin term, Creditors, At AGM, At Board Meeting, IEPF)
Answer:

Group 'A'	Group 'B'
(a) Dividendum	(2) Latin term
(b) Interest	(5) Creditors
(c) At AGM	(3) Final Dividend
(d) At Board Meeting	(4) Interim Dividend
(e) Government Fund	(1) IEPF

In simple words: "Dividendum" is a Latin term, interest is paid to creditors, Final Dividend is typically declared at an AGM, Interim Dividend at a Board Meeting, and IEPF is a government fund.

🎯 Exam Tip: Focus on linking the correct terms with their associated concepts, parties, or meeting types.

 

Question 2.

Group 'A'	Group 'B'
(a) Preference Shares	(1) __________
(b) Equity Shares	(2) __________
(c) Deposit holders	(3) __________
(d) __________	(4) Payment of Dividend
(e) __________	(5) Dividend Declared but not paid/claimed

(Fixed rate Dividend, Dividend at a Fluctuating Rate, Interest, within 30 days, Unclaimed/Unpaid Dividend)
Answer:

Group 'A'	Group 'B'
(a) Preference Shares	(1) Unclaimed/Unpaid Dividend
(b) Equity Shares	(2) Within 30 days
(c) Deposit holders	(3) Interest
(d) Fixed rate of Dividend	(4) Payment of Dividend
(e) Dividend at a Fluctuating Rate	(5) Dividend Declared but not paid/claimed

In simple words: This table links Preference Shares to unclaimed dividends, Equity Shares to a 30-day payment period, Deposit holders to interest, Fixed Rate of Dividend to dividend payment, and Fluctuating Rate of Dividend to declared but unpaid/unclaimed dividends.

🎯 Exam Tip: Carefully map the characteristics of different financial instruments and stakeholders to their associated conditions or statuses regarding payments and declarations.

 

Exercise 1H. Answer in one sentence.

Question 1.What is Dividend?
Answer: The dividend is a share in distributable profits of the company to which the shareholder in entitled when formally declared by the company.
In simple words: A dividend is a part of a company's profits that is distributed to its shareholders once formally announced.

🎯 Exam Tip: Focus on dividend as a share of *distributable profits* for *shareholders*.

 

Question 2.Who has the right to recommend dividends?
Answer: The Board of directors has the right to recommend.
In simple words: The company's Board of Directors holds the authority to propose or suggest dividend payments to shareholders.

🎯 Exam Tip: Remember that recommendation comes from the Board, not the shareholders themselves.

 

Question 3.What is a Final Dividend?
Answer: The final dividend is that dividend that is declared and paid after the close of the financial year.
In simple words: The final dividend is a payment made to shareholders after the company's financial year has officially ended.

🎯 Exam Tip: The key identifier for a final dividend is its declaration *after* the financial year concludes.

 

Question 4.What is an Interim Dividend?
Answer: The interim dividend is that dividend that is declared and paid between two AGMs of an accounting year.
In simple words: An interim dividend is a dividend paid during the financial year, before the annual accounts are finalized, usually between two AGMs.

🎯 Exam Tip: Interim dividends provide returns to shareholders mid-year.

 

Question 5.Who declares Interim Dividend?
Answer: The Board of directors declares Interim dividends.
In simple words: The Board of Directors has the sole power to announce and pay an interim dividend without awaiting a full financial year-end or AGM approval.

🎯 Exam Tip: Understand the Board's specific authority over interim dividend declarations.

 

Question 6.Which shares get dividends at a fixed rate?
Answer: Preference shares get dividends at a fixed rate.
In simple words: Preference shares are a type of equity that guarantees a predetermined, consistent dividend payment rate.

🎯 Exam Tip: Fixed dividend rates are a primary characteristic that distinguishes preference shares.

Question 7. The number of days within which payment of dividend be completed by the company after its declaration.
Answer: 30 days
In simple words: Companies must pay dividends to shareholders within 30 days of declaring them to comply with regulations.

🎯 Exam Tip: Remembering key timelines like dividend payment periods is vital for scoring in legal compliance questions.

 

Question 8. Dividend declared between two AGMs.
Answer: Interim Dividend
In simple words: An interim dividend is a payment made to shareholders by a company during its financial year, before the annual general meeting.

🎯 Exam Tip: Distinguish between interim and final dividends based on their declaration timing relative to AGMs.

 

Question 9. Dividend decided and declared by the Board.
Answer: Interim Dividend
In simple words: The company's Board of Directors has the authority to decide and declare an interim dividend without needing shareholder approval at an AGM.

🎯 Exam Tip: Note the authority for declaring different types of dividends; Board for interim, shareholders (upon Board recommendation) for final.

 

Question 10. The return is paid to the creditors by the company.
Answer: Interest
In simple words: Interest is the regular payment a company makes to its creditors for the use of borrowed funds.

🎯 Exam Tip: Clearly differentiate between 'dividend' (for shareholders) and 'interest' (for creditors) as returns on investment/debt.

1I. Correct The Underlined Word And Rewrite The Following Sentences.

 

Question 1. The dividend is paid to creditors.
Answer: The dividend is paid to shareholders.
In simple words: Dividends are profits distributed specifically to the company's shareholders, not its creditors.

🎯 Exam Tip: Always associate dividends with shareholders and interest with creditors to avoid common errors.

 

Question 2. Interest is paid to shareholders.
Answer: Interest is paid to creditors.
In simple words: Interest is a payment made to those who have lent money to the company, known as creditors.

🎯 Exam Tip: Understanding the relationship between different stakeholders (shareholders, creditors) and their respective returns is fundamental.

 

Question 3. The final Dividend is paid between two AGM.
Answer: Interim Dividend is paid between two AGM.
In simple words: Interim dividends are distributed during the financial year, between two annual general meetings, unlike final dividends which are declared after the year-end.

🎯 Exam Tip: Pay attention to the timing of dividend payments; interim dividends are mid-year, final dividends are post-year-end.

 

Question 4. Special Resolution must be passed to declare the Final Dividend.
Answer: An ordinary resolution must be passed to declare the Final Dividend.
In simple words: To declare a final dividend, only an ordinary resolution by shareholders is required, not a special resolution.

🎯 Exam Tip: Know the type of resolution required for different corporate actions; ordinary for final dividends, special for more significant changes.

 

Question 5. The dividend must be paid within 60 days of its declaration.
Answer: The dividend must be paid within 30 days of its declaration.
In simple words: Companies are legally required to pay the declared dividend within 30 days of its announcement.

🎯 Exam Tip: Memorize the statutory deadlines for dividend payment as they are frequently tested compliance points.

 

Question 6. The Dividend to be paid should be transferred to Dividend A/c within 30 days of its declaration.
Answer: The Dividend to be paid should be transferred to Dividend A/c within 5 days of its declaration
In simple words: The amount of declared dividend must be moved to a separate dividend bank account within 5 days of its declaration.

🎯 Exam Tip: Differentiate between the 5-day transfer to a dividend account and the 30-day payment deadline to shareholders.

 

Question 7. The dividend is an obligation to be paid by a company every year.
Answer: Interest is an obligation to be paid by a company every year.
In simple words: Interest payments are a fixed legal obligation for a company, regardless of its profits, unlike dividends which are dependent on profits and declaration.

🎯 Exam Tip: Understand that interest is a mandatory charge against profits, while dividends are an appropriation of profits and not strictly mandatory annually.

 

Question 8. Preference shareholders are given the last priority in the payment of dividends.
Answer: Equity shareholders are given the last priority in the payment of dividends.
In simple words: Equity shareholders receive dividends only after preference shareholders have been paid, placing them last in priority.

🎯 Exam Tip: Recall the hierarchy of dividend payment; preference shareholders have priority over equity shareholders.

 

Question 9. Preference shareholders get dividends from residual profits.
Answer: Equity shareholders get dividends from residual profits.
In simple words: Equity shareholders receive dividends from the profits remaining after all other obligations, including preference dividends, have been met.

🎯 Exam Tip: Associate 'residual profits' with equity shareholders, as their dividend rate often fluctuates based on company performance.

 

Question 10. Dividend is payable every year irrespective of profits made by the company.
Answer: Interest is payable every year irrespective of profits made by the company.
In simple words: Interest is a mandatory payment to creditors that must be made regardless of whether the company earns a profit.

🎯 Exam Tip: Remember that interest is a fixed charge against profits, making it payable even in losses, unlike dividends.

1J. Arrange In Proper Order.

 

Question 1.
(a) Recommendation of Dividend.
(b) Checking sufficiency of profits
(c) Board Meeting
Answer:
(a) Checking sufficiency of profits
(b) Board Meeting
(c) Recommendation of Dividend
In simple words: The process starts with ensuring enough profits, then the Board meets, and finally, a dividend is recommended.

🎯 Exam Tip: Understanding the sequence of corporate actions for dividend declaration is crucial for procedural questions.

 

Question 2.
(a) Transfer to Dividend Account
(b) Transfer to IEPF
(c) Transfer to Unpaid Dividend Account
Answer:
(a) Transfer to Dividend Account
(b) Transfer to Unpaid Dividend Account
(c) Transfer to IEPF
In simple words: Initially, declared dividends go to a separate dividend account, then unpaid amounts move to an unpaid dividend account, and finally, unclaimed funds go to IEPF after seven years.

🎯 Exam Tip: Pay attention to the specific accounts and timelines for dividend fund transfers to ensure compliance knowledge.

 

Question 3.
(a) Closure of Register of Members.
(b) Intimate Stock Exchange of Board Meeting.
(c) Intimate Stock Exchange of declaration of dividend.
Answer:
(a) Intimate Stock Exchange of Board Meeting
(b) Intimate Stock Exchange of declaration of dividend
(c) Closure of Register of Members
In simple words: First, the stock exchange is informed about the Board Meeting, then about the dividend declaration, and finally, the register of members is closed for record-keeping.

🎯 Exam Tip: Timely communication with the stock exchange and proper maintenance of member records are key compliance requirements for listed companies.

 

Question 4.
(a) Decision on Rate of Dividend
(b) Transfer of IEPF
(c) Payment of Dividend
Answer:
(a) Decision on Rate of Dividend
(b) Payment of Dividend
(c) Transfer to IEPF
In simple words: The process involves deciding the dividend rate, then paying it out, and finally transferring any unclaimed amounts to the IEPF.

🎯 Exam Tip: This sequence highlights the lifecycle of dividend distribution from initial decision to handling unclaimed funds.

 

Question 5.
(a) Payment of Interim Dividend
(b) Board meeting deciding and declaring Interim Dividend
(c) Authorization of Articles of Association
Answer:
(a) Authorization of Articles of Association
(b) Board meeting deciding and declaring Interim Dividend
(c) Payment of Interim Dividend
In simple words: First, the company's Articles of Association must authorize interim dividends, then the Board declares it, and finally, the dividend is paid.

🎯 Exam Tip: Always check the company's foundational documents (Articles) for powers related to interim dividends before considering other steps.

2. Explain The Following Terms/Concepts.

 

Question 1. Profit
Answer: Profit is the financial gain from business activity minus expenses. Profit is the income remaining after deducting total costs from total revenue. It is also called financial gain. Profit is the difference between revenues and expenses for a given period. It is the tool for measuring the success of the business. Without profit, the company cannot survive in the market.
In simple words: Profit is the money a business earns after covering all its expenses, serving as a key indicator of its financial health and sustainability.

🎯 Exam Tip: Emphasize that profit is essential for business survival and growth; differentiate it from revenue.

 

Question 2. Dividend
Answer: The term dividend is derived from the Latin word 'Dividendum' which means that which is to be divided. A dividend is the portion of the company's earnings distributed to the shareholders decided and managed by the company's board of directors. The dividend is a share in distributable profits of the company Shareholder is entitled to receive the dividend when it is formally declared by the company
In simple words: A dividend is a share of a company's profits paid out to its shareholders, typically declared by the board of directors.

🎯 Exam Tip: Highlight the Latin origin of 'dividend' and its core meaning as a distribution of profits to owners (shareholders).

 

Question 3. Interest
Answer: Interest is the cost of borrowing money typically expressed as an annual percentage of a loan. The money people earn on their savings is called Interest. Interest is paid to the lender by the borrower, in case of a loan or from the financial institution to the depositor, in the case of a savings account. In financial terms, it is a payment made for using the money of another i.e. borrower takes money from the lender. Interest is the cost of renting the money for the borrower and it is the income from lending money for the lender.
In simple words: Interest is the price paid for borrowing money, serving as a cost for the borrower and income for the lender.

🎯 Exam Tip: Focus on interest as a cost of capital for the company and a return for creditors/depositors.

 

Question 4. Final Dividend
Answer: The final dividend is declared and paid after the financial year is closed. The final dividend is decided and recommended by the Board of Directors. The final dividend is approved by the shareholder in the AGM. The declaration of the final dividend does not require authorization of Articles of Association. The rate of the final dividend is always higher than the Interim dividend. It is declared from sources like the current year's profits, money provided by Government for dividends, etc.
In simple words: A final dividend is a share of profit declared by the company after the close of the financial year, recommended by the Board and approved by shareholders at the AGM.

🎯 Exam Tip: Remember that final dividends are post-year-end, require shareholder approval, and are typically higher than interim dividends.

 

Question 5. Interim Dividend
Answer: The interim dividend is the dividend that is declared and paid in the middle of an accounting year i.e. before the finalization of accounts for the year. Dividend declared by the Board of Directors between two Annual General Meetings is called Interim Dividend. The interim dividend is paid in the middle of the accounting year.
In simple words: An interim dividend is a dividend paid during the financial year, before the final annual accounts are prepared, and is declared by the Board of Directors.

🎯 Exam Tip: Differentiate interim dividends by their mid-year declaration and payment, decided solely by the Board without AGM approval.

 

Question 6. Unpaid Dividend
Answer: Dividend declared by the company but neither paid to nor claimed by a shareholder within 30 days of its declaration is termed as Unpaid and Unclaimed Dividend.
In simple words: An unpaid dividend is a declared dividend that remains undistributed or unclaimed by a shareholder after the 30-day payment period.

🎯 Exam Tip: Understand the legal definition and timeline (30 days) for a dividend to be classified as 'unpaid' or 'unclaimed'.

 

Question 7. Unpaid Dividend Account
Answer: A dividend declared by the company but neither paid to nor claimed by a shareholder is called an Unpaid/Unclaimed Dividend. This unpaid/unclaimed dividend should be transferred to the Unpaid/Unclaimed Account within 30 days of its declaration. This 'Unpaid Dividend Account' is opened in a scheduled Bank by the company.
In simple words: An Unpaid Dividend Account is a special bank account where declared but unclaimed dividends are transferred within 30 days by the company.

🎯 Exam Tip: Note the specific bank account and the 30-day transfer deadline for unpaid dividends.

 

Question 8. Dividend Mandate
Answer: The dividend is paid by different modes of payment like cash, cheque, or warrant or by electronic mode. It can also be paid by using the Dividend Mandate. If the shareholder wishes to get dividend credited directly in the Bank Account he is required to send a request in a prescribed form which is called 'Dividend Mandate'. The dividend Mandate authorizes the company to pay dividends directly to shareholders' bankers.
In simple words: A Dividend Mandate is a formal instruction from a shareholder to the company, authorizing it to directly credit dividend payments to their bank account.

🎯 Exam Tip: Understand dividend mandate as a convenient electronic payment method that requires shareholder's prior authorization.

 

Question 9. IEPF
Answer: IEPF means Investors Education and Protection Fund. Any amount in the Unpaid Dividend Account of a company that is unpaid/ unclaimed for a period of 7 (seven years) from the date of such a transfer shall be, transferred to ‘Investors Education and Protection Fund'. The claimant can claim his dividend by filling the prescribed form and submitting the necessary documents. The claimant needs to follow the procedure.
In simple words: IEPF (Investors Education and Protection Fund) is a fund where unclaimed dividends are transferred after seven years, allowing claimants to recover their dues by following a prescribed procedure.

🎯 Exam Tip: Remember the 7-year timeline for transfer to IEPF and its purpose for investor protection and education.

 

Question 10. Rate of Dividend
Answer: The return that a shareholder receives on his investment from the company is called a dividend. The dividend is always declared by the company on the face value of a share irrespective of its market value. The rate of dividend is expressed as a percentage of the face value of a share per annum.
In simple words: The rate of dividend is the percentage of a share's face value that a shareholder receives as a return on investment, usually expressed annually.

🎯 Exam Tip: Crucially, note that dividend rates are always calculated on the *face value* of a share, not its market value.

3. Study The Following Case/Situation And Express Your Opinion.

 

1. LMN Co Limited decides to declare a dividend for the financial year 2018-19 in which it has earned profits less than their expectations.

 

Question (a). Is Board right in recommending a dividend of Rs. 5/- per share out of free reserves?
Answer: Yes, Board is right in recommending a dividend of Rs. 5/- per share out of free reserves, as dividends can be paid out of free reserves.
In simple words: The Board can recommend dividends from free reserves if current profits are insufficient, as these reserves are distributable.

🎯 Exam Tip: Understand that dividends can be paid from both current profits and accumulated free reserves, subject to company policies and legal limits.

 

Question (b). Can Board declare the dividend though it is not approved by AGM?
Answer: No Board cannot declare the divided if it is not approved by AGM as dividends should be approved by shareholders by passing an ordinary resolution in AGM.
In simple words: Final dividends, even if recommended by the Board, require approval from shareholders through an ordinary resolution at the Annual General Meeting.

🎯 Exam Tip: Distinguish the Board's role (recommendation) from shareholders' role (approval) for final dividend declaration.

 

Question (c). Can the Board give dividends in the form of gifts?
Answer: No Board cannot give dividends in the form of gifts. It must be paid in cash, not in kind.
In simple words: Dividends must always be paid in cash or through electronic means, not in the form of non-cash gifts.

🎯 Exam Tip: Remember the rule that dividends must be paid in monetary form, not as goods or services, to ensure liquidity and fairness.

 

2. ABC Co. Ltd. decides to pay Interim Dividend.

 

Question (a). Can it be paid out of free reserves?
Answer: No. the Interim Dividend cannot be paid out of free reserves.
In simple words: Interim dividends can only be paid from current profits and not from accumulated free reserves.

🎯 Exam Tip: Crucially distinguish that interim dividends have stricter source rules, typically only from current year profits, unlike final dividends.

 

Question (b). Is the Board right in declaring the same at the Board Meeting?
Answer: Yes. Board is right in declaring the same at the Board meeting as it has the power to declare an Interim Dividend.
In simple words: The Board of Directors holds the authority to declare interim dividends during a Board Meeting without needing shareholder approval.

🎯 Exam Tip: Highlight that the Board's power to declare interim dividends is a key difference from final dividends.

 

Question (c). Can the company distribute the same within 30 days of its declaration?
Answer: Yes, after the declaration, the Interim dividend should be paid within 30 days of its declaration.
In simple words: Like final dividends, interim dividends also must be paid out to shareholders within 30 days of their declaration.

🎯 Exam Tip: Note that the 30-day payment rule applies uniformly to both interim and final dividends.

 

3. RAJ Company limited decides to pay Interim Dividend.

 

Question (a). Is the Board justified to decide Interim Dividend of Rs. 5/per share even though profits to date are insufficient?
Answer: The interim dividend is paid out of profits between two annual general meetings. I cannot be paid out of any reserves. So it is not justified.
In simple words: It is not justified for the Board to declare an interim dividend if current profits are insufficient, as interim dividends cannot be paid from reserves.

🎯 Exam Tip: Reinforce that interim dividends are strictly tied to available profits of the current period, not past reserves.

 

Question (b). Can the Board declare it out of Free Reserves?
Answer: No Board cannot declare an Interim dividend out of free reserves.
In simple words: Interim dividends are strictly paid from current profits and cannot be sourced from a company's free reserves.

🎯 Exam Tip: Remember the clear distinction in sources for interim vs. final dividends; interim cannot use free reserves.

 

Question (c). Can the Board declare it out of Capital?
Answer: No Board cannot declare out of capital.
In simple words: Companies are legally prohibited from declaring or paying dividends out of their capital.

🎯 Exam Tip: A fundamental rule: dividends are distributions of profit, never capital, to protect shareholder equity.

 

4. DIAMOND Co. Ltd. is considering declaring an Interim Dividend.

 

Question (a). In how many days of the declaration it should transfer the funds to Dividend Account?
Answer: The interim dividend must be transferred to the Dividend Account within 5 days of its declaration.
In simple words: The company must move the interim dividend amount to a dedicated Dividend Account within 5 days of declaring it.

🎯 Exam Tip: Distinguish the 5-day transfer period to the Dividend Account from the 30-day payment period to shareholders.

 

Question (b). In how many days it must pay it to shareholders?
Answer: The interim dividend should be paid within 30 days of its declaration to shareholders.
In simple words: The interim dividend must be distributed to all eligible shareholders within 30 days of its official declaration.

🎯 Exam Tip: The 30-day payment timeline is consistent for both interim and final dividends.

 

Question (c). In how many days of the declaration it must transfer the funds to the Unpaid Dividend A/c?
Answer: Unpaid/unclaimed Interim dividend should be transferred to 'Unpaid Dividend Account' within 7 days of the expiry of 30 days of declaration i.e. 37 days of its declaration.
In simple words: Any interim dividend remaining unpaid or unclaimed after 30 days must be transferred to the Unpaid Dividend Account within a further 7 days (total 37 days from declaration).

🎯 Exam Tip: Track the progression of funds: declaration (Day 0), transfer to dividend account (Day 5), payment deadline (Day 30), and transfer to unpaid dividend account (Day 37).

 

5. The Board of Directors of STAR Co. Ltd. which is a listed company recommends a dividend of Rs. 15/- per share to be paid in cash.

 

Question (a). Is it justified to pay the dividend firstly to its Preference Shareholders and then after to Equity Shareholders?
Answer: Yes, because preference shares are entitled to the dividend before it is paid to the equity shareholder. Equity shareholders get dividends from residual profits i.e. after paying to preference shareholders.
In simple words: It is justified to pay preference shareholders first, as they have priority over equity shareholders in receiving dividends.

🎯 Exam Tip: Prioritize preference shareholders over equity shareholders when discussing dividend distribution in scenarios.

 

Question (b). Is the AGM required to approve the same?
Answer: Yes for declaration of final divided Approval of AGM is a must.
In simple words: Shareholder approval at the AGM is mandatory for the declaration of final dividends.

🎯 Exam Tip: Remember that final dividend proposals, even if recommended by the Board, must pass shareholder approval at the AGM.

 

Question (c). Can the company pay dividends in cash?
Answer: Yes, the company pay a dividend in cash and not in kind.
In simple words: Dividends are legally required to be paid in monetary form (cash or electronic transfer), not as goods or services.

🎯 Exam Tip: Payment of dividends in cash is the standard and legally compliant method; payment in kind is generally prohibited.

 

6. GOLD Co. Ltd. declares a dividend of Rs. 10/- per share for F.Y. 2018-19.

 

Question (a). Is the company under default, if the dividend was not paid within 30 days of its declaration?
Answer: Yes, the company is to default as the time limit within which the company must pay dividends after the declaration is 30 days.
In simple words: The company is in default if it fails to pay the declared dividend within the mandated 30-day period.

🎯 Exam Tip: Timely payment of dividends is a strict compliance requirement; non-adherence leads to default status.

 

Question (b). Is the company right in transferring the unpaid dividend to its Debenture Reserve Account?
Answer: No, the company has to transfer the total amount of dividend which remains unpaid/unclaimed to the 'Unpaid Dividend Account.
In simple words: Unpaid dividends must be transferred to a specific 'Unpaid Dividend Account', not to a Debenture Reserve Account, to ensure proper handling.

🎯 Exam Tip: Be precise about the destination of unpaid dividend funds; it must be the designated Unpaid Dividend Account.

 

Question (c). Does the company have to transfer the amount of unpaid dividend to IEPF after 30 days?
Answer: No, any amount in the unpaid dividend account of a company that remains unpaid/unclaimed for a period of 7 years from the date of such a transfer, should be transferred to (IEPF), 'Investors Education and Protection Fund'.
In simple words: Unpaid dividends are transferred to the IEPF only after they remain unclaimed for seven years from the date they were transferred to the Unpaid Dividend Account, not after just 30 days.

🎯 Exam Tip: Distinguish between the 30-day payment deadline, the subsequent transfer to the Unpaid Dividend Account, and the much longer 7-year period for transfer to IEPF.

4. Distinguish Between The Following:

 

Question 1. Final Dividend and Interim Dividend
Answer:

Points	Interim Dividend	Final Dividend
1. Meaning	Interim Dividend is the dividend that is declared between two Annual General Meetings of a company.	The final Dividend is the dividend that is declared at the Annual General Meeting of a company.
2. When declared?	It is declared between two Annual General Meetings.	It is declared after the completion of the financial year of the company.
3. Who declares?	The interim dividend is declared by the Board of Directors by passing a resolution.	The final dividend is decided and recommended by the Board of Directors. It is declared by the shareholders.
4. Authorization	Authorization of Articles is necessary for the declaration of interim dividends.	Authorization of Articles is not necessary for the declaration of the final dividend.
5. Rate of Dividend	The rate of the Interim dividend is lower than the final dividend.	The rate of the final dividend is always higher than the Interim dividend.
6. Source	It is declared out of profits of the current accounting year.	It is declared from different sources like the current year's profits, free reserves, capital profits, money provided by Government for dividends, etc.
7. Accounting Aspect	It is declared before the preparation of the final accounts of the company.	It is declared only after the accounts of the year are prepared and finalized.

In simple words: Interim dividends are declared mid-year by the Board, while final dividends are declared after the financial year-end by shareholders based on Board recommendation.

🎯 Exam Tip: Focus on timing (mid-year vs. year-end), authority (Board vs. shareholders), and sources of funds (current profits vs. broader sources) to differentiate between interim and final dividends.

 

Question 2. Dividend and Interest
Answer:

Points	Dividend	Interest
1. Meaning	The dividend is the return payable to the shareholders of the company for their investment in the share capital.	It is the return payable to the creditors of the company. For e.g. Debenture holder, Deposit holders.
2. Intervals	Dividends need not be paid on regular basis and they can vary according to the company's profits.	Interest has to be paid at regular intervals at a fixed rate.
3. Given to whom	It is paid to the member i.e. the owners of the company.	It is paid to the creditor of the company.
4. Expense	Dividends are not the expense as they are based on the profit made. If no profit, they are not paid for that period.	Interest is the expense to the company.
5. Rate of Dividend	The rate of the Interim dividend is lower than the final dividend.	The rate of the final dividend is always higher than the Interim dividend.
6. Obligation	It has to be paid only when the company made profits.	It is not linked to the Profits of the company. It is an obligation for the company.
7. When payable	It is payable when a company earns sufficient profit.	It is payable every year irrespective of the profits of the company.
8. Rate	It is paid at a fluctuating rate to the equity shareholders.	The rate of Interest is Fixed and pre-determined at the time of issue of the security.

In simple words: Dividends are profits distributed to shareholders, depend on company profits, and are not a mandatory expense; interest is a fixed payment to creditors, a mandatory expense, and independent of profit levels.

🎯 Exam Tip: Clearly differentiate between dividends (appropriation of profit, for shareholders, not obligatory) and interest (charge against profit, for creditors, obligatory, fixed rate).

5. Answer In Brief.

 

Question 1. State any four points to be kept in mind by a listed company with respect to dividends.
Answer: When a company lists its shares on Stock Exchange, additional listing agreements are to be followed which are as follows:

• Stock exchange should be informed if the securities are listed 2 days prior to the Board meeting in which recommendation of final dividend is to be considered.


• Stock Exchange should be informed immediately regarding the declaration of dividend as soon as the Board meeting gets over.


• Notice of closing book should be informed at least 7 (seven) working days before the closure to the stock exchange.


• Transfer Register and Register of Members should be closed.

In simple words: Listed companies must ensure transparent and timely communication with the stock exchange about Board meetings, dividend declarations, and record closures.

🎯 Exam Tip: Focus on compliance and disclosure requirements for listed companies regarding dividends, especially the notification timelines.

 

Question 2. Discuss any four features of dividend.
Answer:

• It is the portion of profits of the company paid to its shareholders.


• It is payable out of profits of the company.


• It is an unconditional payment made by the company.


• If the company has issued equity shares with differential rights as to dividend, the terms of issue of such shares will govern the rights of shareholders about receiving the dividend.

In simple words: Dividends are a share of company profits paid unconditionally to shareholders, governed by the terms of their shares.

🎯 Exam Tip: Remember that dividends are profit-dependent, for shareholders, and can vary based on share types.

 

Question 3. Explain the features of interest.
Answer: Interest is the cost of borrowing money typically expressed as an annual percentage of a loan. The money people earn on their savings is called Interest. Interest is paid to the lender by the borrower in case of a loan or from the financial institution to the depositor in the case of a savings account. In financial terms, it is a payment made for using the money of another i.e. borrower takes money from the lender. Interest is the cost of renting the money for the borrower and it is the income from lending money for the lender.
Features:

• Interest is the price paid for the productive services rendered by capital.


• Interest has a direct relation with risk. The higher the risk, the higher is the interest.


• The rate of interest is expressed as the annual percentage of the principal.


• The rate of interest is determined by various factors like money supply, fiscal policy, the volume of borrowings, rate of inflation, etc.


• Interest is a charge against the profit of the Company. Even if, the company makes no profit, interest should be paid.


• The rate of interest is fixed and pre-determined.

In simple words: Interest is a fixed-rate charge for borrowed capital, considered an expense, payable regardless of profit, and influenced by market factors and risk.

🎯 Exam Tip: Focus on interest as a mandatory expense, its fixed nature, and its relationship with risk and economic factors.

6. Justify The Following Statements.

 

Question 1. The dividend is paid out of the profits of the company.
Answer:

• The dividend is the portion of profits of the company paid to its shareholders.


• It is payable out of profits of the company.


• Dividend can be paid out of capital profits on fulfilling these conditions.


• Capital Profits are realized in cash.


• Articles of Association of the company permit such a distribution.


• It remains as profits after revaluation of all assets and liabilities.


• Thus, it is rightly justified that dividend is paid out of profits of the company.

In simple words: Dividends represent a distribution of a company's earnings or accumulated profits to its shareholders, legally requiring available profits for payment.

🎯 Exam Tip: Emphasize that dividends are an appropriation of profits, not capital, and are subject to specific conditions even when paid from capital profits.

 

Question 2. Interim dividends cannot be paid out of free reserves.
Answer:

• Dividend declared by the Board of Directors between two Annual General Meetings is called Interim Dividend.


• The interim dividend shall not be declared out of free reserves.


• In the event of a loss or inadequacy of profits during a financial year, no interim dividend shall be declared.


• The declaration of an interim dividend does not create a debt against a company.


• The board of directors can cancel an interim dividend after declaring it.


• Thus, it is rightly justified that Interim dividends cannot be paid out of reserves.

In simple words: Interim dividends are typically paid from current year profits and are legally restricted from being distributed from a company's free reserves.

🎯 Exam Tip: Highlight the legal restriction on using free reserves for interim dividends, which contrasts with final dividends, to score well.

 

Question 3. Annual General Meeting (AGM) is crucial for Final Dividend.
OR
The final Dividend is declared only after the accounts are prepared and finalized.
Answer:

• The final dividend is that dividend that is declared and paid after the closing of the financial year.


• It is decided and recommended by the Board of Directors.


• The rate of final dividend is declared by the shareholders in the AGM.


• It is declared only after the account of the year is prepared and finalized.


• Thus, it is rightly said that AGM is crucial for the Final Dividend. OR Final Dividend is declared only after the accounts are prepared and finalized.


• The final dividend is declared from different sources, and its declaration does not need the authorization of articles.


• Thus, it is rightly said that AGM is crucial for the Final Dividend. OR Final Dividend is declared only after the accounts are prepared and finalized.

In simple words: The AGM is essential for final dividends because shareholders formally approve the dividend rate after the company's annual financial accounts are finalized.

🎯 Exam Tip: Emphasize that the AGM's role is to provide shareholder approval for the final dividend, linking it to the completion and finalization of yearly accounts.

 

Question 5. Equity shareholders get the last priority in receiving dividends.
Answer:

• The dividend is the portion of profits of the company paid to its shareholders.
• The dividend is payable only to the registered shareholders of the company.
• Preference shareholders are entitled to the dividend before it is paid to the equity shareholders.
• The equity shares do not enjoy a preference for dividends.
• They do not have priority for the payment of capital at the time of liquidation.
• Equity shareholders will get dividends from residual profit i.e. after paying to preference shareholders and arrears of dividend on cumulative preference shares.
• The equity shares get the last priority in dividends and thus are the residual claimants.
• Thus, it is rightly said that the equity shareholders get the last priority in receiving dividends.

In simple words: Equity shareholders receive dividends only after all other obligations, including preference shareholders' dividends, are met because they are considered residual claimants, meaning they get what's left after everyone else.

🎯 Exam Tip: Understanding the order of dividend payments (preference vs. equity) is crucial for justifying statements related to shareholder rights and company obligations.

 

Question 6. Unpaid dividends cannot be used by the company.
Answer:

• The dividend declared by the company but has not been paid to or claimed by a shareholder within 30 days of its declaration is termed as an unpaid dividend.
• The total amount of dividend which remains unpaid should be transferred to 'Unpaid Dividend Account'.
• Any amount in the Unpaid Dividend Account of a Company that remains unpaid/unclaimed for a period of 7 years will be transferred to 'Investors Education and Protection Fund'.
• The company cannot use unpaid dividends. The only claimant of money can claim for it by following certain procedures.
• Thus, it is rightly said that unpaid dividends cannot be used by the company.

In simple words: Unpaid dividends are held in a separate account and cannot be used by the company for its operations; after seven years, they are transferred to the Investor Education and Protection Fund (IEPF) for eligible claimants.

🎯 Exam Tip: Remember the specific timelines (30 days for transfer to Unpaid Dividend Account, 7 years for transfer to IEPF) as they are frequently tested legal provisions.

 

Question 7. Interest is a liability/obligation of the company. OR Interest is paid to the creditor of the company.
Answer:

• Interest is a payment made for using another money. So it is the cost of renting the money for the borrower and it is the income from lending money for the lender.
• The company has to pay interest, if it has borrowed money from creditors like Debenture holders, Depositors, Bondholders, etc.
• Interest is the liability of the company as it is a payment made for using money from the lender.
• Interest is a charge against the profit of the company.
• Even if, the company makes no profit, it has to pay interest to borrowers.
• Thus, it is rightly said that interest is a liability/ obligation for the company.

In simple words: Interest is a mandatory payment by a company for using borrowed funds, making it a liability that must be paid to creditors regardless of the company's profitability.

🎯 Exam Tip: Differentiate between dividend (appropriation of profit) and interest (charge against profit) as a key concept in corporate finance.

 

Question 8. Approval of members is not needed for Interim Dividends.
Answer:

• Dividend declared by the Board of Directors between two Annual General Meetings is called Interim Dividend.
• It is paid in the middle of the accounting year.
• It is declared out of profits of the current account year.
• It is declared before the preparation of final accounts of the company.
• The Board of Directors has the power to declare Interim Dividend.
• Articles of Association' of the Company must authorize the Board of Directors to declare an interim dividend.
• The Board Meeting has to pass a resolution for declaring the Interim dividend.
• Thus, it is rightly said that approval of members is not needed for Interim dividends.

In simple words: Interim dividends are decided and declared by the Board of Directors during the financial year, and do not require shareholder approval at an AGM.

🎯 Exam Tip: Remember that interim dividends are a Board decision, while final dividends require shareholder approval at the AGM, a key distinction for corporate governance.

7. Answer The Following Questions

 

Question 1. Define Dividend and explain its features.
Answer:The term dividend is derived from the Latin word 'Dividendum' which means that which is to be divided. A dividend is the portion of the company's earnings distributed to the shareholders decided and managed by the company's board of directors. The dividend is a share of distributable profits of the company. A shareholder is entitled to receive the dividend when it is formally declared by the company.
Definitions:

• The Institute of Chartered Accountants of India has defined Dividend "as a distribution to shareholders out of profits or reserves available for this purpose".
• The Supreme Court has defined it as "In case of going - concern, it means the portion of profits of a company, which is allotted to the holders of shares in a company".

Features of Dividend:

• It is the portion of profits of the company paid to its shareholders.
• It is payable out of profits of the company.
• It is an unconditional payment made by the company.
• The company pays dividends to the equity shareholders and preference shareholders only.
• If the company has issued equity shares with differential rights as to dividend, the terms of issue of such shares will govern the rights of shareholders about receiving the dividend.
• A dividend cannot be declared out of capital.
• Recommendation of the Board of Directors is necessary for the declaration of dividends.
• The dividend is recommended and approved by the Board of Directors by passing a resolution at the Annual General Meeting.
• The previous year's dividend cannot be declared if that particular year's Annual Account has been approved in the AGM.
• Dividend once approved and declared by shareholders, creates a debt. It cannot be revoked.
• The dividend includes the interim dividend.
• The dividend must be paid in cash, cheque or transferred through ECS or NEFT and not in kind.
• The dividend is to be paid on the paid-up value of shares.
• Dividend cannot be paid on calls paid in advance.

In simple words: A dividend is a share of a company's distributable profits paid to its shareholders, declared by the board, often approved at an AGM, and is an unconditional payment that cannot be paid from capital.

🎯 Exam Tip: When defining "Dividend," ensure you include its Latin origin and explain its core purpose as a distribution of profits, along with key features like payment method and source.

 

Question 2. What is Interest? Explain its features.
Answer:Interest is the cost of borrowing money typically expressed as an annual percentage of a loan. The money people earn on their savings is called Interest. Interest is paid to the lender by the borrower in case of a loan or from the financial institution to the depositor in the case of a savings account. In financial terms, it is a payment made for using the money of another i.e. borrower takes money from the lender. Interest is the cost of renting the money for the borrower and it is the income from lending money for the lender.
Features:

• Interest is the price paid for the productive services rendered by capital.
• Interest has a direct relation with risk. The higher the risk, the higher is the interest.
• The rate of interest is expressed as an annual percentage of the principal.
• The rate of Interest is determined by various factors like money supply, fiscal policy, the volume of borrowings, rate of inflation, etc.
• Interest is a charge against the profit of the Company. Even if the company makes no profit, interest should be paid.
• The rate of interest is fixed and pre-determined.

In simple words: Interest is the cost of borrowing capital, paid periodically to lenders or depositors, and is a fixed obligation for the company, irrespective of its profits.

🎯 Exam Tip: Highlight that interest is a *charge* against profits, meaning it must be paid even if the company makes no profit, distinguishing it from dividends which are an *appropriation* of profits.

 

Question 3. Discuss legal provisions for declaration of dividend.
Answer:The term dividend is derived from the Latin word 'Dividendum' which means that which is to be divided. A dividend means the profit of a company that is not retained in Legal Provisions for declaration of Dividend.

(i) Board Meeting:

• The Board of Directors has the power and authority to declare the dividend.
• The board meeting is called to pass a resolution to discuss the following points.
• Rate of Dividend and amount of Dividend to be paid.
• Book closure date for dividend.
• Date of Annual General Meeting.
• Bank with which a separate account should be opened to remit the dividend amount.

(ii) Shareholders' Approval:

• The dividend is approved by shareholders by passing an Ordinary Resolution at the Annual General Meeting.
• Shareholders can declare a lower rate of dividend than what is recommended by the Board but not higher than that.
• Once the dividend is declared at the General Meeting, it cannot be canceled. Hence, the company cannot declare dividends for the second time in that year.

(iii) Separate Bank Account: The company must deposit the dividend amount in a separate bank account i.e. "Dividend Account" opened in a scheduled bank. The dividend must be transferred to this account within 5 days of its declaration.

(iv) Prohibition to pay Dividend:

• A company cannot declare any dividend on equity shares if the company has failed to repay the deposit or any interest on the deposit.
• If the company is found guilty at the time of Payment of Interest to debenture holders, Redemption of Debentures and Preference Shares, Payment of Interest to a financial institution, etc. in that case no dividend can be declared.

In simple words: Dividend declaration involves a board meeting to recommend, shareholder approval at the AGM (with limits on increasing the rate), transfer of funds to a separate bank account within 5 days, and adherence to specific conditions regarding company defaults on other payments.

🎯 Exam Tip: Pay close attention to the roles of the Board and shareholders, the timelines for fund transfers, and the conditions under which dividend payment is prohibited, as these are critical legal aspects.

 

Question 4. Explain Interim Dividend.
Answer:

• The interim dividend is the dividend that is declared and paid in the middle of an accounting year i.e. before the finalization of accounts for the year. Dividend declared by the Board of Directors between two Annual General Meetings is called Interim Dividend.
• The interim dividend is paid in the middle of the accounting year.
• The interim dividend is declared by the Board of directors during any financial year out of surplus in the profit and loss account and out of profits of the financial year.

Features of Interim Dividend:

• The Board of Directors has the power to declare an interim dividend.
• Interim Dividend is only payment on account of the whole dividend for the year.
• The company should provide depreciation for the entire year and not for a part of the year before declaring an interim dividend.
• Interim dividends cannot be paid out of any reserves.
• The Board of directors can declare interim dividend only when it is mentioned in the Articles of Association of the Company.
• A resolution has to be passed in the Board Meeting for declaring the Interim Dividend.
• A separate Bank account should be maintained in a scheduled bank to credit the interim dividend within 5 (five) days of its declaration.
• Interim Dividend should be paid within 30 days of its declaration.
• Unpaid/Unclaimed dividend should be transferred to 'Unpaid Dividend Account' within 7 days of the expiry of 30 days of declaration i.e. 37 days of its declaration.
• Any amount remaining Unpaid/Unclaimed in the 'Unpaid Dividend Account' for 7 (seven) years should be transferred to IEPF.

In simple words: An interim dividend is declared and paid by the Board of Directors during the financial year, before the final accounts are prepared, from current profits, and has specific timelines for payment and transfer to a separate account.

🎯 Exam Tip: Pay attention to the specific timelines for interim dividend payment (30 days) and fund transfer to a separate account (5 days, and then 37 days to Unpaid Dividend Account if unclaimed), as these are often points of legal compliance.