S.Y.J.C. (Commerce) Prof.

Vijay Patil

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CHAPTER 10 – DIVIDEND & INTEREST

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Q.1. Define Dividend & Explain its Features.

Ans: A) MEANING:
Term 'Dividend' is derived from the Latin word 'Dividendum'. It is a
part of the profits of the company that is distributed among the
shareholders of the company.

B) DEFINITION:
The Institute of Chartered Accountants of India [ICAI] has
defined Dividend as, "A distribution of shareholders out of profits or
reserves available for this purpose."

C) FEATURES OF DIVIDEND:
1. It is the portion of profits of the company paid to its shareholders.
It is payable out of the profits of the company.
2. Dividend cannot be declared out of capital.
3. Dividend is an unconditional payment made by the company. Company
can pay Dividend only to the shareholders. i.e. Equity & Preference.
4. Dividend can be declared only on recommendation of the Board of
Directors. It is approved and declared by resolution passed at Annual
General Meeting by the shareholders.
5. Dividend once approved and declared by shareholders creates a debt.
6. It cannot be revoked [Cancelled].
7. Dividend must be paid in cash and not in kind.
8. Dividend is to be paid on paid-up value of shares.
9. Dividend cannot be paid on calls paid in advance.
10. Dividend includes Interim Dividend.

D) CONCLUSION:
Dividend is the return paid by the company.

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S.Y.J.C. (Commerce) Prof. Vijay Patil

Q.2. State the Legal Provisions on Sources of Dividend.

Ans: A) MEANING:
Term 'Dividend' is derived from the Latin word 'Dividendum'. It is a
part of the profits of the company that is distributed among the
shareholders of the company.

B) DEFINITION:
The Institute of Chartered Accountants of India [ICAI] has
defined Dividend as, "A distribution of shareholders out of profits or
reserves available for this purpose."

C) LEGAL PROVISIONS:
The legal provisions related to sources of Dividend are as follows:
1. Payment of Dividend out of Profits:
 Company may declare and pay Dividend for any financial year out
of following -
 Out of profits of the company of current financial year, after
providing for depreciation and transfer to Reserves.
 Out of profits of the company of any previous financial year, after
providing for depreciation and transfer to Reserves.
 Money provided by the Central or State Government to pay
Dividend.

2. Payment of Dividend out of Capital Profits:

 Capital Profits means profits made by the company on sell of fixed
assets.
 Or premium earned on the issue of shares.
 Dividend can be paid out of capital profits on fulfilling these
conditions:
 Capital Profits are realized in cash.
 Articles of Association of the Company permits such a distribution.
 It remains as profits after revaluation of all Assets & Liabilities.

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S.Y.J.C. (Commerce) Prof. Vijay Patil

3. Payment of Dividend out of Free Reserves:

 Free Reserves of the company means there is no specific purpose for
these reserves.
 It is allowed to pay the Dividend out of free reserves of the company.

4. Payment of Dividend not out of Capital:

 It is not permitted to pay the Dividend out of capital of the company.

D) CONCLUSION:
Dividend is the return paid by the company.

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Q.3. What are the Statutory Provisions Governing Declaration of Dividend

& Payment of Dividend?
Ans: A) MEANING:
Term 'Dividend' is derived from the Latin word 'Dividendum'. It is a
part of the profits of the company that is distributed among the
shareholders of the company.

B) DEFINITION:
The Institute of Chartered Accountants of India [ICAI] has
defined Dividend as, "A distribution of shareholders out of profits or
reserves available for this purpose."

C) LEGAL PROVISIONS FOR DECLARATION OF DIVIDEND:

The Legal Provisions regarding the declaration of dividend are as follows:
1. Board Meeting:
 Dividend can be declared only on recommendation of Board of
Directors.
 Board Meeting should be called to pass resolution about:
a) Rate of Dividend and amount of Dividend to be paid.
b) Book closure date for Dividend.
c) Date of Annual General Meeting.

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S.Y.J.C. (Commerce) Prof. Vijay Patil

d) Bank with which a separate account should be opened to remit

dividend amount.

2. Shareholders' Approval:
 Dividend is approved and declared by a resolution passed at the
Annual General Meeting by shareholders.
 Dividend once approved and declared by shareholders creates a
debt.
 It cannot be revoked [Cancelled].

3. Separate Bank A/c:

 The company must deposit the Dividend amount in a separate bank
account.
 This account opened in a scheduled bank called as 'Dividend
Account' within 5 days of its declaration.
 If company's shares are listed on stock exchange listing agreements
must be followed.

4. Prohibition to Pay Dividend:

No Dividend can be declared if company has defaulted on:
a) Redemption of Preference Shares
b) Redemption of Debentures or Payment of Interest
c) Payment of Interest to Financial Institution.

D) LEGAL PROVISIONS FOR PAYMENT OF DIVIDEND:

The Legal Provisions regarding the payment of dividend are as follows:
1. Ways to Payment of Dividend:
 Dividend must be paid in cash and not in kind.
 Dividend may be paid by cheque or warrant or by any electronic
mode to the shareholder.

2. Joint Holding of Shares:

 Dividend warrant should be sent to the registered address of the
first named joint shareholder as per the Register of Members.

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S.Y.J.C. (Commerce) Prof. Vijay Patil

 Or to such a person at his address as the shareholder or joint

shareholders have given to the company in writing.

3. Time Limit:
 There is a time limit within which the Dividend is to be paid.
 Company must pay Dividend within 30 days from the date of its
declaration.

4. Dividend Entitlement:
 Dividend is payable only to the registered shareholders of the
company.
 Equity shareholders will get Dividend after payment to the
preference shareholders.

5. Payment Made To:

 If shares are held in electronic form, Dividend will be paid to the
beneficial owner as per the statements of Depository.
 If shares are held in physical form, Dividend is paid to the
shareholders as per the Register of Members.

6. Default:
If the company defaults in the payment of Dividend in the given time
it will result in:
a) Punishment to every director of company.
b) Company will be liable to pay simple interest @ 12% p.a. during the
period when the default continues.

E) CONCLUSION:
Dividend is the return paid by the company.

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S.Y.J.C. (Commerce) Prof. Vijay Patil

Q.4. What are the Statutory Provisions Governing Unclaimed Dividend and
Unpaid Dividend?
Ans: A) MEANING:
Term 'Dividend' is derived from the Latin word 'Dividendum'. It is a
part of the profits of the company that is distributed among the
shareholders of the company.

B) DEFINITION:
The Institute of Chartered Accountants of India [ICAI] has
defined Dividend as, "A distribution of shareholders out of profits or
reserves available for this purpose."

C) STATUTORY PROVISIONS:
The rules that govern Unpaid / Unclaimed Dividend are as follows:
1. Unpaid Dividend Account:
 Total amount of Dividend which remains Unpaid / Unclaimed
should be transferred to 'Unpaid Dividend Account'.
 This Account opened in a scheduled bank by the company.
 This transfer should be made within 37 days from the declaration of
Dividend.

2. Statement on a Website:
 Company is required to put statement on website as approved by
Central Government.
 This is done within 90 days of transfer of amount in the 'Unpaid
Dividend Account'.
 Statement shows names, last known addresses and unpaid amount
payable to each shareholder.

3. A Claiming Unpaid Dividend:

 Any claimant may apply to the company for the payment of money
claimed.

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S.Y.J.C. (Commerce) Prof. Vijay Patil

4. Transfer to I.E.P.F.:
 Any amount in the Unpaid Dividend Account of a company which
remain unpaid for a period of 7 years.
 After this period, Unpaid Dividend transfer to Investors Education
& Protection Fund [I.E.P.F.].

5. Claim from I.E.P.F.:

 The claimant of money will have to follow the procedures and submit
necessary documents to get claim from I.E.P.F.
 Statement in the prescribed from which gives details of such
transfers.

D) CONCLUSION:
Dividend is the return paid by the company.

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Q.5. Explain the term 'Interest' and its Features.

Ans: A) MEANING:
In financial terms, it is a payment made for using money of another.
i.e. Borrower takes money from the lender. So interest is the cost of renting
money, for the borrower and it is the income from lending money for the
lender.

B) FEATURES:
1. Interest is the price paid for the productive services rendered by
capital.
2. It is directly related to risk. Higher the risk, higher is the interest.
3. Rate of Interest is expressed as annual percentage of Principal.
4. Rate of interest is determined by various factors like money supply,
fiscal policy, volume of borrowings, rate of inflation etc.
5. Interest is a charge against the profit of the company. Even if
company makes no profit, interest should be paid.

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S.Y.J.C. (Commerce) Prof. Vijay Patil

6. It is payable at a fixed and generally pre-determined rate. Company

has to pay interest if it has borrowed money from creditors like
Debentures holders, Depositors, Bond holders, etc.

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Q.6. Distinction Between:

1. Interim Dividend & Final Dividend:

Interim Dividend Final Dividend

1. Meaning:
It is the Dividend which is declared It is the Dividend which is declared
and paid between two AGMs of an and paid after the close of the
accounting year. financial year.
2. Authorization:
It can be declared only if Articles of It does not need authorization by
Association permits its declaration. Articles of Association.
3. Declared:
It is decided and declared by the It is declared by the shareholders in
Board of Directors in the Board the AGM.
Meeting.
4. Rate:
Rate of Interim Dividend is lower than Rate of Final Dividend is always
Final Dividend. higher than Interim Dividend.
5. Account Aspect:
It is declared before preparation and It is declared after preparation and
finalisation of the final accounts of the finalisation of the final accounts of the
company. company.
6. Source:
It is declared out of profits of the It is declared from different sources
current accounting year. like current year's profit, free reserves,
capital profits, money provided by
government for dividend, etc.

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S.Y.J.C. (Commerce) Prof. Vijay Patil

2. Dividend & Interest:

Dividend Interest
1. Meaning:
It is the return payable to the It is the return payable to the creditors
shareholders of the company for their of the company for their investment in
investment in the share capital. the borrowed capital.
2. Obligation:
It is to be paid only when company has It is not linked to the profits of the
made profits. Therefore, payment of company. Therefore, payment of
dividend is no obligation to pay. interest is an obligation to pay.
3. Given to:
It is paid to the member i.e. the It is paid to the creditor of the
owners of the company. company.
4. Account Aspect:
Dividend is an appropriation of profit. Interest is a charge on profit.
5. Rate:
It is paid at a fluctuating rate to the It is fixed and predetermined at the
equity shareholders. Since it is linked time of issue of the security.
to the profits of the company.
6. Payable:
It is payable when a company earn It is payable every year irrespective of
sufficient profits in a year. profits of the company.

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OBJECTIVE TYPE QUESTIONS

A) Select the correct answer from the options given below and rewrite
the statements.
1. Dividend is paid to ____________
(a) Shareholder (b) Debenture holder (c) Depositor

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S.Y.J.C. (Commerce) Prof. Vijay Patil

2. ____________ is profit shared by company with a shareholder.

(a) Interest (b) Rent (c) Dividend

3. Dividend is recommended by ____________

(a) Managing Director (b) Secretary (c) Board of Directors

4. Interim Dividend is declared by ____________

(a) Board of Directors (b) Debenture holders (c) Depositors

5. Final Dividend is declared by ____________

(a) Board of Directors (b) Shareholders (c) Depositors

6. Dividend cannot be declared out of ____________

(a) Capital (b) Profit (c) Reserves

7. Dividend amount should be transferred in a separate Bank Account within

____________ days of its declaration.
(a) 5 (b) 15 (c) 50

8. Dividend should be paid within ____________ days of its declaration.

(a) 3 (b) 13 (c) 30

9. ____________ holders get dividend from residual profits.

(a) Equity share (b) Preference share (c) Debenture

10. Dividend is paid first to ____________ shareholders.

(a) Equity (b) Preference (c) Deferred

11. ____________ warrant is a cheque containing dividend amount sent by

company to the shareholders.
(a) Dividend (b) Share (c) Interest

12. IEPF is created by ____________ where unpaid dividend is transferred by

company.
(a) Central Government (b) Company (c) Shareholders

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S.Y.J.C. (Commerce) Prof. Vijay Patil

13. Payment of ____________ Dividend must be authorised by the Articles of

Association.
(a) Interim (b) Final (c) Bonus

14. ____________ is a return paid to creditors by the company.

(a) Dividend (b) Interest (c) Rent

15. ____________ is not linked to profits of the company.

(a) Dividend (b) Interest (c) Bonus

16. Unpaid or unclaimed dividend shall be transferred to ‘Investors Education

& Protection Fund’ on expiry of ____________ years.
a) 3 b) 7 c) 5

17. Dividend warrants are issued to ____________ holders for getting dividend.
a) share certificate b) share warrant c) coupon

18. The ____________ recommends the final dividend.

a) shareholders b) Board of Directors c) promoters

19. Final dividend is declared at ____________ meeting.

a) extra-ordinary general b) statutory c) annual general

20. ____________ is an RBI approved electronic mode of payment of dividend.

a) IEPF b) ECF c) ECS

B) Write a word or a term or a phrase:

1. The return on investment is paid to the Dividend
shareholders of the company.
2. The meeting where the final dividend is declared. AGM
3. The company has to intimate the stock exchange Listed company
about the declaration of dividends.

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S.Y.J.C. (Commerce) Prof. Vijay Patil

4. The shareholders get dividends at a fixed rate. Preference

5. The shareholders get dividends at a fluctuating Equity
rate.
6. Request by the shareholder in the prescribed form Dividend
for payment of dividend into shareholders bank Mandate
amount.
7. The number of days within which payment of 30 days
dividend be completed by the company after its
declaration.
8. Dividend declared between two AGMs. Interim Dividend
9. Dividend decided and declared by the Board. Interim Dividend
10. The return is paid to the creditors by the company. Interest
11. A dividend remaining unpaid to shareholders even Unpaid Dividend
after the expiry of 30 days of its declaration.
12. The Latin word from which the word ‘dividend’ is Dividendum
derived.
13. Portion of the profits which is allocated to the Dividend
shareholders.
14. The account where the company has to transfer Unpaid Dividend
unpaid or unclaimed dividend. Account
15. A document that authorises the Board of Directors Articles of
to declare Interim Dividend. Association

C) State whether the following statements are True or False.

1. The dividend is paid to registered shareholders of the company. True
2. The dividend is decided by the Board. True
3. The dividend is decided by the shareholders. False
4. Dividend once declared cannot be revoked. True
5. Dividend cannot be paid out of capital. True
6. Shareholders decide about the rate and amount of profit to be False
given as dividends.

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S.Y.J.C. (Commerce) Prof. Vijay Patil

7. All categories of shareholders get a fixed-rate dividend. False

8. IEPF is the fund created by the company. False
9. Interest is a liability for the company. True
10. Interest is paid to shareholders of the company. False
11. There are no legal provisions regarding payment of dividend. False
12. Dividend can be paid on advance amount of calls. False
13. The rate of interim dividend is greater than final dividend. False
14. Equity shareholders will get dividend from residual profits True
15. Dividend can be paid out of free reserves. True

D) Find the odd one.

1. Final Dividend, Interim Dividend, Interest.
2. Out of Capital, Out of free reserve, Out of money given by the government.
3. Dividend Account, Dividend Mandate, Unpaid / Unclaimed Dividend A/c
4. Dividend warrant, Dividend Mandate, Cheque.
5. Unpaid Dividend A/c, IEPF, Dividend A/c.
6. Fixed Rate, Obligation of the company, Depends on the profits.

E) Complete the Sentences.

1. Word dividend is derived from Latin term ____________ Dividendum
2. Dividend is paid to ____________ registered
shareholders
3. Dividend can be declared only on recommendation of Board of
____________ Directors
4. Dividend must be paid in ____________ cash
5. The meeting at which final dividend is approved is AGM
____________
6. Dividend cannot be paid out of ____________ capital
7. Interim dividend is decided and declared by ____________ Board of
Directors

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S.Y.J.C. (Commerce) Prof. Vijay Patil

8. Pre-decided and a fixed rate of dividend is paid to preference

____________ shareholder

9. Payment of dividend must be completed within 30 days

____________
10. Payment of Interim Dividend needs to be authorized by Articles of
____________ Association
11. The obligatory payment made by company to its creditors Interest
is called as ____________
12. In order to declare the interim dividend, a resolution Board
needs to be passed in the ____________
13. The dividend declared by the company but not claimed by Unclaimed
the shareholder is termed as ____________ dividend
14. ____________ meeting must be called to pass resolution Board
about of rate of dividend.
15. A listed company has to express the dividend on per share
____________ basis only.

F) Select the correct option from the bracket.

a) (Latin term, Creditors, At AGM, At Board Meeting, IEPF)
Sr. Sr.
Group ‘A’ Group ‘B’
No. No.
1) Dividendum a) At Board Meeting
2) Interest b) Latin term
3) IEPF c) Final Dividend
4) At AGM d) Interim Dividend
5) Government Fund e) Creditors

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S.Y.J.C. (Commerce) Prof. Vijay Patil

b) (Fixed rate Dividend, Dividend at a Fluctuating Rate, Interest, within

30 days, Unclaimed/Unpaid Dividend)
Sr. Sr.
Group ‘A’ Group ‘B’
No. No.
1. Preference Shares A. Unclaimed/Unpaid Dividend
2. Equity Shares B. Within 30 days
3. Deposit holders C. Interest
4. Fixed rate of Dividend D. Payment of Dividend
5. Dividend at a Fluctuating E. Dividend Declared but not
Rate paid/claimed

G) Correct the underlined word/s and rewrite the following sentences.

1. The dividend is paid to creditors. shareholders
2. Interest is paid to shareholders. creditors
3. The final Dividend is paid between two AGM. Interim
Dividend
4. Special Resolution must be passed to declare the Final ordinary
Dividend. resolution
5. The dividend must be paid within 60 days of its 30 days
declaration.
6. The Dividend to be paid should be transferred to 5 days
Dividend A/c within 30 days of its declaration.
7. The dividend is an obligation to be paid by a company Interest
every year.
8. Preference shareholders are given the last priority in the Equity
payment of dividends.
9. Preference shareholders get dividends from residual Equity
profits.
10. Dividend is payable every year irrespective of profits Interest
made by the company.
11. Final dividend is declared by Board of Directors. Shareholders
12. Dividend must be paid in kind. Cash

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S.Y.J.C. (Commerce) Prof. Vijay Patil

13. Dividend warrant authorizes the company to pay Mandate

dividend directly to shareholder’s bankers.
14. The shareholders declare the interim dividend. Board of
Directors
15. Interest is paid to shareholders. Creditors

H) Arrange in proper order:

1. Recommendation of Dividend, Checking sufficiency of profits, Board
Meeting.
Ans: Checking sufficiency of profits, Board Meeting, Recommendation of
Dividend.

2. Transfer to Dividend Account, Transfer to IEPF, Transfer to Unpaid

Dividend Account.
Ans: Transfer to Dividend Account, Transfer to Unpaid Dividend Account,
Transfer to IEPF.

3. Closure of Register of Members, Intimate Stock Exchange of Board

Meeting, Intimate Stock Exchange of declaration of dividend.
Ans: Intimate Stock Exchange of Board Meeting, Intimate Stock Exchange
of declaration of dividend, Closure of Register of Members.

4. Decision on Rate of Dividend, Transfer of IEPF, Payment of Dividend.

Ans: Decision on Rate of Dividend, Payment of Dividend, Transfer of IEPF.

5. Payment of Interim Dividend, Board meeting deciding and declaring

Interim Dividend, Authorization of Articles of Association.
Ans: Authorization of Articles of Association, Board meeting deciding and
declaring Interim Dividend, Payment of Interim Dividend.

6. Payment to preference shareholders, declaration of dividend, payment to

equity shareholders.
Ans: Declaration of dividend, Payment to preference shareholders,
payment to equity shareholders.

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S.Y.J.C. (Commerce) Prof. Vijay Patil

I) Explain the following terms / concepts.

1. Profit:
Ans: Explanation:
 Profit maximization is the prime aim of all business organisations.
 Profit is the difference between revenues and the expenses for a given
period.
 The shareholders invest with an aim of earning returns [dividend], out of
the profits of the company.

2. Dividend:
Ans: Explanation:
 Term 'Dividend' is derived from the Latin word 'Dividendum'.
 Dividend is a part of the profits of the company that is distributed among
the shareholders of the company.
 Dividend cannot be declared out of capital.

3. Rate of Dividend:
Ans: Explanation:
 Dividend is a part of the profits of the company that is distributed among
the shareholders of the company.
 Equity shares are given dividend at fluctuating rate, depending upon
profits of the company.
 Preference shares are given dividend at fixed rate.
 Interim dividend is lower than final dividend.

4. Interim Dividend:
Ans: Explanation:
 Interim Dividend is the Dividend which is declared and paid between two
AGMs of an accounting year.
 Interim Dividend can be declared only if Articles of Association permits its
declaration.
 It is decided and declared by the Board of Directors in the Board Meeting.
 Rate of Interim Dividend is lower than Final Dividend.

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S.Y.J.C. (Commerce) Prof. Vijay Patil

5. Final Dividend:
Ans: Explanation:
 Final Dividend is the Dividend which is declared and paid after the close
of the financial year.
 Final Dividend does not need authorization by Articles of Association.
 Final Dividend is declared by the shareholders in the AGM.
 Rate of Final Dividend is always higher than Interim Dividend.

6. Dividend Mandate:
Ans: Explanation:
 Dividend is a part of the profits of the company that is distributed among
the shareholders of the company.
 A shareholder may wish to get dividend credited directly in the bank
account.
 In such case, shareholder is required to send a request to the company in
the prescribed form called ‘Dividend Mandate’.
 Dividend Mandate authorizes the company to pay dividend directly to
shareholders’ bankers.

7. Unpaid Dividend:
Ans: Explanation:
 Dividend has not been paid by company or claimed by a shareholder
within 30 days of its declaration is termed as ‘Unpaid Dividend’.
 Total amount of Dividend which remains Unpaid / Unclaimed should be
transferred to 'Unpaid Dividend Account'.
 This Account opened in a scheduled bank by the company.
 This transfer should be made within 37 days from the declaration of
Dividend.

8. IEPF:
Ans: Explanation:
 Dividend has not been paid by company or claimed by a shareholder
within 30 days of its declaration is termed as ‘Unpaid Dividend’.

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S.Y.J.C. (Commerce) Prof. Vijay Patil

 Any amount in the Unpaid Dividend Account of a company which remain

unpaid for a period of 7 years.
 After this period, Unpaid Dividend transfer to Investors Education &
Protection Fund [I.E.P.F.].

9. Interest:
Ans: Explanation:
 Interest is the return payable to the creditors of the company for their
investment in the borrowed capital.
 Interest is not linked to the profits of the company. Therefore, payment of
interest is an obligation to pay.
 Interest is paid to the creditor of the company.
 Interest is a charge on profit.

J) Justify the following statements:

1. Dividend is paid out of profits of the company.
Ans: This statement is True.
Explanation:
 Dividend is the return payable to the shareholders of the company for their
investment in the share capital.
 Dividend is to be paid only when company has made profits. Therefore,
payment of dividend is no obligation to pay.
 Dividend is paid to the member i.e. the owners of the company.
 Dividend is an appropriation of profit.
 Hence, Dividend is paid out of profits of the company.

2. AGM is crucial for Final Dividend.

Ans: This statement is True.
Explanation:
 Final Dividend is the Dividend which is declared and paid after the close
of the financial year.
 Final Dividend is declared by the shareholders in the AGM.
 Rate of Final Dividend is always higher than Interim Dividend.

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S.Y.J.C. (Commerce) Prof. Vijay Patil

3. Listed company has to follow additional guidelines on dividend

matters.
Ans: This statement is True.
Explanation:
 Listed company notify the stock exchange at least 2 days in advance of
date of board meeting held to recommendation of final dividend.
 Intimate stock exchange immediately about declaration of the dividend
after the Board Meeting.
 Give notice of book closure to the stock exchange at least 7 working days
before closure.
 Close the register of members and the transfer register.
 It must use electronic mode of payment such as ECS or NEFT.
 Listed company has to express the dividend on per share basis only.
 Hence, listed company has to follow additional guidelines on dividend
matters.

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4. Equity shares get last priority in dividend.

Ans: This statement is True.
Explanation:
 Dividend is the return payable to the shareholders of the company for their
investment in the share capital.
 Dividend is to be paid only when company has made profits. Therefore,
payment of dividend is no obligation to pay.
 Preference shareholders are entitled to dividend before it is paid to the
equity shareholders.
 Equity shareholders will get dividend after paying to preference
shareholders.
 Hence, equity shares get last priority in dividend.

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S.Y.J.C. (Commerce) Prof. Vijay Patil

5. Unpaid dividend cannot be used by the company.

Ans: This statement is True.
Explanation:
 Dividend has not been paid by company or claimed by a shareholder
within 30 days of its declaration is termed as ‘Unpaid Dividend’.
 Total amount of Dividend which remains Unpaid / Unclaimed should be
transferred to 'Unpaid Dividend Account'.
 This Account opened in a scheduled bank by the company.
 This transfer should be made within 37 days from the declaration of
Dividend.
 Any amount in the Unpaid Dividend Account of a company which remain
unpaid for a period of 7 years.
 After this period, Unpaid Dividend transfer to Investors Education &
Protection Fund [I.E.P.F.].

6. Interim dividend cannot be paid out of free reserves.

Ans: This statement is True.
Explanation:
 Interim Dividend is the Dividend which is declared and paid between two
AGMs of an accounting year.
 Interim Dividend can be declared only if Articles of Association permits its
declaration.
 It is decided and declared by the Board of Directors in the Board Meeting.
 Rate of Interim Dividend is lower than Final Dividend.

7. Approval of members is not needed for interim dividend.

Ans: This statement is True.
Explanation:
 Interim Dividend is the Dividend which is declared and paid between two
AGMs of an accounting year.
 Interim Dividend can be declared only if Articles of Association permits its
declaration.

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S.Y.J.C. (Commerce) Prof. Vijay Patil

 It is decided and declared by the Board of Directors in the Board Meeting.

 Rate of Interim Dividend is lower than Final Dividend.

8. Interest is a liability / obligation of the company.

Ans: This statement is True.
Explanation:
 It is the return payable to the creditors of the company for their investment
in the borrowed capital.
 It is not linked to the profits of the company. Therefore, payment of interest
is an obligation to pay.
 It is paid to the creditor of the company.
 Interest is a charge on profit.

STUDY THE FOLLOWING CASE / SITUATION &

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.
a. Is Board right in recommending a dividend of Rs. 5/- per share out of
free reserves?
Ans: As per rules, companies are allowed to pay dividend out of their free
reserves. So Yes, the Board can recommend dividend of Rs. 5/- per share
out of free reserves.

b. Can Board declare the dividend though it is not approved by AGM?

Ans: No, Board cannot declare the dividend though it is not approved by AGM.

c. Can the Board give dividends in the form of gifts?

Ans: As per rules, dividend must be paid in cash and not in kind. So cannot
give dividends in the form of gifts.

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S.Y.J.C. (Commerce) Prof. Vijay Patil

2. 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.
1. Is it justified to pay the dividend firstly to its Preference Shareholders
and then after to Equity Shareholders?
Ans: Yes, it is justified to pay the dividend firstly to its Preference Shareholders
and then after to Equity Shareholders. Because Equity Shareholders will
get dividend after paying to Preference Shareholders.

2. Is the AGM required to approve the same?

Ans: Yes, the AGM required to approve the Dividend.

3. Can the company pay dividends in cash?

Ans: Dividend should be paid by cheque or warrant or by electronic mode to the
entitled shareholder.
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3. GOLD Co. Ltd. declares a dividend of Rs. 10/- per share for F.Y.
2018-19.
1. Is the company under default, if the dividend was not paid within 30
days of its declaration?
Ans: Yes, the company under default, if the dividend was not paid within 30
days of its declaration.

2. Is the company right in transferring the unpaid dividend to its

Debenture Reserve Account?
Ans: No, the company is not right in transferring the unpaid dividend to its
Debenture Reserve Account. It should be transferred to Unpaid Dividend
A/c in a scheduled bank.

3. Does the company have to transfer the amount of unpaid dividend to

IEPF after 30 days?
Ans: No, the company cannot transfer the amount of unpaid dividend to IEPF
after 30 days. Because Unpaid Dividend of a company remain unpaid for
7 years from date of such transfer.

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S.Y.J.C. (Commerce) Prof. Vijay Patil

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

1. Can it be paid out of free reserves?
Ans: No, Interim dividend cannot be paid out of free reserves.

2. Is the Board right in declaring the same at the Board Meeting?

Ans: Yes, the Board of Directors has the power to decided and declare the same
at the Board Meeting.

3. Can the company distribute the same within 30 days of its

declaration?
Ans: Yes, the company should distribute the same within 30 days of its
declaration.
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5. RAJ Company limited decides to pay Interim Dividend.
1. Is the Board justified to decide Interim Dividend of Rs. 5/per share
even though profits to date are insufficient?
Ans: No, the Board is not justified to decide Interim Dividend of Rs. 5/per share
even though profits to date are insufficient. This is because interim
dividend is declared out of profits.

2. Can the Board declare it out of Free Reserves?

Ans: No, the Board cannot declare interim dividend out of Free Reserves.

3. Can the Board declare it out of Capital?

Ans: No, the Board cannot declare interim dividend out of capital.

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

1. In how many days of the declaration it should transfer the funds to
Dividend Account?
Ans: The funds should be transferred to Dividend A/c within 5 days from date
of declaration of interim dividend.

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S.Y.J.C. (Commerce) Prof. Vijay Patil

2. In how many days it must pay it to shareholders?

Ans: The interim dividend must be paid to shareholders within 30 days from its
declaration.

3. In how many days of the declaration it must transfer the funds to the
Unpaid Dividend A/c?
Ans: Within 37 days of the declaration it must transfer the funds to the Unpaid
Dividend A/c.

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7. SHINE Industries Ltd. Has borrowed capital at an interest rate of

10% p.a.
1. Does the company have to pay interest if it has not made any profits
in the current financial year?
Ans: Payment of interest is an obligation and is to be paid the company
compulsorily. So company has to pay the interest even if it has not made
any profits.

2. Can the company change the rate of interest every year?

Ans: No, the company cannot change the rate of interest every year as it is fixed
at the time of issue of security.

3. Does the company need to approve the interest at an AGM before

making the payment?
Ans: No, the company does not need to approve the interest at an AGM before
making the payment.

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