CA Inter P2 · Chapter 7
Declaration and Payment of Dividend MCQs with Answers
9 multiple-choice questions on Declaration and Payment of Dividend for CA Inter P2 Corporate and Other Laws. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Under section 123(4), the amount of dividend declared, including interim dividend, must be deposited in a separate account with a scheduled bank within:
- A) Fifteen days from the date of the AGM notice
- B) Seven days from the date of declaration
- C) Five days from the date of declaration
- D) Thirty days from the date of declaration
Show answer & explanation
Answer: C) Five days from the date of declaration
Section 123(4) requires the amount of dividend, including interim dividend, to be deposited in a scheduled bank in a separate account within five days from the date of declaration. Payment to shareholders is then made from this account.
Question 2
Which of the following can be a source of dividend under section 123(1)?
- A) Securities premium account
- B) Profits of the current financial year arrived at after providing for depreciation as per Schedule II
- C) Surplus arising on revaluation of fixed assets
- D) Unrealised gains on measuring investments at fair value
Show answer & explanation
Answer: B) Profits of the current financial year arrived at after providing for depreciation as per Schedule II
Section 123(1) allows dividend out of the current year's profits after depreciation, out of undistributed profits of previous years after depreciation, or both. It may also be paid out of money provided by the Central or State Government under a guarantee. Unrealised and notional gains, revaluation gains and fair value changes are excluded when computing profits. The securities premium account is capital in nature.
Question 3
A dividend declared by Sapphire Ltd has not been paid or claimed within thirty days of declaration. Under section 124(1), the unpaid amount must be transferred to the Unpaid Dividend Account within:
- A) Five days from the expiry of the thirty days
- B) Thirty days from the expiry of the thirty days
- C) Ninety days from the date of declaration
- D) Seven days from the expiry of the thirty days
Show answer & explanation
Answer: D) Seven days from the expiry of the thirty days
Section 124(1) requires a company to transfer the total unpaid or unclaimed dividend to a special account called the Unpaid Dividend Account. The account must be opened in a scheduled bank within seven days from the expiry of the thirty-day period. Under section 124(2), a statement of the unpaid amounts must be placed on the company's website within ninety days of the transfer.
Question 4
Under section 124(5), money in the Unpaid Dividend Account that remains unpaid or unclaimed must be transferred, with interest accrued, to the Investor Education and Protection Fund after a period of:
- A) Five years from the date of transfer to the Unpaid Dividend Account
- B) Seven years from the date of transfer to the Unpaid Dividend Account
- C) Ten years from the date of declaration
- D) Three years from the date of declaration
Show answer & explanation
Answer: B) Seven years from the date of transfer to the Unpaid Dividend Account
Section 124(5) requires any money in the Unpaid Dividend Account that is unpaid or unclaimed for seven years from the date of transfer to be transferred, with interest accrued, to the IEPF established under section 125. Under section 124(6), shares on which dividend has been unpaid or unclaimed for seven consecutive years are also transferred to the IEPF.
Question 5
Emerald Ltd declared dividends of 10%, 12% and 8% in the three immediately preceding financial years. It has incurred a loss in the current financial year up to the end of the quarter immediately before the date on which the Board proposes an interim dividend. What is the maximum rate of interim dividend it can declare?
- A) 10%
- B) 8%
- C) No interim dividend can be declared
- D) 12%
Show answer & explanation
Answer: A) 10%
The proviso to section 123(3) states that where a company has incurred a loss in the current year up to the end of the quarter immediately preceding the declaration, interim dividend cannot exceed the average of the dividends declared in the immediately preceding three financial years. Average = (10 + 12 + 8) / 3 = 30 / 3 = 10%. The loss does not prohibit interim dividend outright.
Question 6
Under section 123(6), a company that has failed to comply with the provisions of sections 73 and 74 (acceptance and repayment of deposits) shall not declare dividend on:
- A) Its equity shares only if the Tribunal so orders
- B) Any class of shares for five years after the failure
- C) Its preference shares only
- D) Its equity shares, so long as the failure continues
Show answer & explanation
Answer: D) Its equity shares, so long as the failure continues
Section 123(6) provides that a company that fails to comply with sections 73 and 74 shall not, so long as the failure continues, declare any dividend on its equity shares. The prohibition protects depositors by stopping profits being paid out while deposits remain in default.
Question 7
Under section 127, a director is NOT liable for failure to pay a declared dividend within thirty days in which of the following cases?
- A) The company decided to use the funds for working capital
- B) The Board decided to postpone payment until the next quarter
- C) The bank account of the company had insufficient balance due to other payments
- D) There is a dispute regarding the right to receive the dividend
Show answer & explanation
Answer: D) There is a dispute regarding the right to receive the dividend
The proviso to section 127 lists cases where no offence is committed. These are: dividend could not be paid because of the operation of law; the shareholder's directions could not be complied with; there is a dispute about the right to receive the dividend; the dividend was lawfully adjusted against a sum due from the shareholder; or the failure was not due to any default of the company. Diverting the funds or lacking money are not excuses.
Question 8
Under the provisos to section 123(1), before declaring dividend for the current financial year a company must:
- A) Redeem all outstanding preference shares
- B) Transfer at least ten per cent of profits to a general reserve
- C) Obtain the approval of the Registrar for the rate of dividend
- D) Set off carried over previous losses and depreciation not provided in previous years against the profit of the current year
Show answer & explanation
Answer: D) Set off carried over previous losses and depreciation not provided in previous years against the profit of the current year
A proviso to section 123(1) requires carried over previous losses and depreciation not provided in previous years to be set off against the current year's profit before any dividend is declared for that year. There is no compulsory transfer to reserves; the company may transfer such percentage of profits as it thinks appropriate.
Question 9
Under section 126, where an instrument of transfer of shares has been delivered to the company but the transfer has not yet been registered, the company shall:
- A) Cancel the dividend on those shares
- B) Pay the dividend to the transferor immediately
- C) Pay the dividend to the transferee named in the instrument of transfer
- D) Transfer the dividend relating to those shares to the Unpaid Dividend Account, unless the registered holder authorises in writing payment to the transferee
Show answer & explanation
Answer: D) Transfer the dividend relating to those shares to the Unpaid Dividend Account, unless the registered holder authorises in writing payment to the transferee
Section 126 provides that where a transfer instrument has been delivered but the transfer is not registered, the company shall transfer the dividend on those shares to the Unpaid Dividend Account under section 124. This applies unless the registered holder authorises the company in writing to pay it to the transferee. Rights and bonus shares on those shares are similarly kept in abeyance.