Question

Required information [The following information applies to the questions displayed below.] Incentive Corporation was authorized to issue 12,000 shares of common stock, each with a $1 par value. During its first year, the following selected transactions were completed: a. Issued 6,800 shares of common stock for cash at $28 per share. b. Issued 2,800 shares of common stock for cash at $31 per share. 4. Incentive Corporation has $38,000 in the company's bank account. At year-end, the accounts reflected a profit of $300. What is the maximum amount of cash dividends the company can declare and distribute? Maximum amount of cash dividends

Answer 1

The maximum amount of cash dividends that company can declare and distribute is $300. Dividends should be distributed only out of the profits earned by the company. Th balance of $38,000 in the cash account is not due to profits of the company. So, the entire cash balance of $38,000 cannot be declared as dividends. The balance in the retained earnings is $300 which is the maximum amount can be declared and distributed as dividends.