This problem is based on the principles that govern payment of dividend.
It is evident that Reconstructions Co. Ltd. has not made profit capable of being distributed to members as dividend.
My advise to directors of Reconstructions Co. Ltd is that it is unlawful to recommend dividend. This advise is justified on the premise that dividend is payable out of profit and Reconstructions Co. Ltd has not made any distributable profit during the 2000-2001 financial year. In fact the company made a loss of Kshs5 million. The profit of Kshs3 million realised from the sale of land cannot be distributed since losses of circulating assets of the current accounting period must be made good before dividend is paid.
The underlying principle in the distribution of dividend is that each financial year is considered on its own.
The Articles of Reconstructions Co. Ltd. is similar to Table A. Reconstructions Co. Ltd. is a mining company with a registered office in Busia. It is anticipated that gold mining in Busia will be exhausted by the year 2005. Since 1994, the Company had not made any provision for depreciation in the value of its assets. During the 1999-2000 financial year Reconstructions Ltd made a trading profit of Kshs4 million. However, its accounts for the financial year 2000-2001 show a loss of Kshs5 million. During the same period the company sold a piece of land in Busia town realising a profit of Kshs3 million on the sale. Directors of Reconstruction Ltd would like to know whether they can recommend dividend. Advise them.
