Let us make an in-depth study about the transfer of profits to reserves.
According to provisions of Company Transfer of Profit to Reserve Rule, 1975, no company can pay or declare dividend out of profit in any year until and unless it transfers a certain percentage of profit to reserve for that year.
The Percentages are given below:
The following items, among others, appeared in the Balance Sheet of X Ltd. as on 18th April 2007:
Profit before interest on Debentures and before payment on tax @ ended 31st March 2008. The Board of Directors of the company proposes a dividend of 15% on equity share capital and capitalisation of profits for making partly paid-up shares into fully paid-up.
Corporate dividend tax is payable @ 10%. Show the Profit and Loss Account, Profit and Loss Appropriation Account to incorporate the Board’s recommendation and show how the items concerned would be shown on the liabilities side of the Balance Sheet.
Total amount of bonus shares =RS, 3,00,000 x 40/60 = Rs,20,000. Since it is partly paid bonus issues, Securities Premium cannot be utilised. Thus, the available amount to be taken from P & L (App.) A/c, i.e., Rs. 1,88,600, and the balance Rs.11,400 to be taken from General Reserve Account.
It has been assumed that interest on Debentures has been paid.