Corporate Dividend Regulations and Creditor Protection Quiz

The Insolvency Test dictates that a corporation cannot pay out dividends if doing so would make it insolvent. Solvency is assessed in both the liquidity sense, where the corporation has cash to pay its bills when due, and the bankruptcy sense, where the corporation's assets are greater than its liabilities and it can pay off its creditors.

The Balance Sheet or Capital Surplus Test permits a corporation to pay dividends only out of surplus, usually including retained earnings and any kind of capital surplus, and not from stated capital.

The Nimble Dividends (Profits) Test allows a corporation to pay dividends out of its current profits.

<p>The accounting concepts used in the legal tests for dividend payments do not represent true market value. They are used to protect creditors instead of the true value of a corporation because valuing a corporation is challenging, and the legal tests are not based on a valuation derived from debatable science.</p> Signup and view all the answers

<p>Different states incorporate one or more legal tests into their statutes, and as corporations choose the state of incorporation, they also choose the laws in place to protect creditors.</p> Signup and view all the answers