Ashcombe plc, a public company, has called-up share capital of £400,000, a share premium account of £100,000 and retained earnings of £220,000. The retained earnings consist of accumulated realised profits of £300,000 less accumulated unrealised losses of £80,000. It has no other reserves, so net assets are £720,000. What is the maximum dividend it may lawfully pay?

Correct answer: A) £220,000

Explanation

A public company must satisfy both the realised profits test and the net assets test in s831. Under the realised profits test, the limit is £300,000. Under s831, net assets after the distribution must not be less than called-up share capital plus undistributable reserves (£400,000 + £100,000 = £500,000). Unrealised losses exceed unrealised profits, so no further undistributable reserve is added. The maximum is £720,000 − £500,000 = £220,000. In effect, a public company must also cover its net unrealised losses, unlike a private company.