Question

Which of the following statements regarding equity is false?

Dividends declared reduce earned capital.

Preferred shareholders are paid a dividend every year.

Par value represents the legal capital that must be retained when a stock is issued.

Paid-in capital in excess of par value is an example of contributed capital.

Answer 1

Answer : Paid in capital in excess of par value is an example of contributed capital.

Analysis :-

Dividend declared reduce earned capital. Earned Capital means net income or retained income. Dividends are paid out from these incomes. So its true that Dividend declared reduce earned capital.

Preference shareholders are paid a dividend every year. Preference shareholders hold a preferential right on dividend and one of it is the dividend payment. So its true that Preference shareholders are paid a dividend every year.

Par Value represents legal capital that must be retained when stock is issued. Legal capital is the amount that cannot leave out of company through any payments such as dividends. It is same as par value of equity or preference issued. So this statement is true.

Paid in capital in excess of par value is not an example of contributed capital. Contributed capital is the total amount paid by the subscriber of shares. It is not the excess money paid over par value. So the statement Paid in capital in excess of par value is an example of contributed capital is false.