hare capital:

165 000 ordinary shares issued

$490 000

General reserve

240 000

Retained earnings

250 000

Total shareholders' equity

$980 000

Requirement 1. What is the maximum amount of cash dividend the board of directors could reasonably declare?The maximum amount of cash dividend that could reasonably be declared is

$nothing

because the general reserve could simply be transferred to

and the resulting total then paid as dividend.Requirement 2. What is the maximum amount of cash dividend the board of directors is likely to declare?The maximum of amount of cash dividend likely to be declared is

$nothing

because by making allocation to general reserve, the directors are presumably indicating that this amount

is

is not

available for the payment of dividend, even though they

could

could not

legally be used for that purpose.Requirement 3. What other item in the company's balance sheet, not shown above, would influence the directors' decision?The balance of available

cash

equity

prepaid expense

would normally be a major factor in determining what amount could be paid as dividend. This might include any

unused

used

borrowing capacity. Thus, in all cases, we are assuming that the company has the

cash

equity

prepaid expense

available to pay the dividend, and also that the company's solvency (its ability to pay its debts as and when they become due)

would

would not

be endangered by payment of the dividend.