Beta Corporation has the following shareholders’ equity accounts: Common stock a

Question

Beta Corporation has the following shareholders’ equity accounts:

Common stock at par $5,000,000
Paid-in capital in excess of par $2,000,000
Retained earnings $25,000,000
Total stockholders’ equity $32,000,000

A.) What is the maximum amount that Beta Corporation can pay in cash dividends, without impairing its legal capital, if it is headquarter in a U.S. state where capital is defined as the par value of common stock?
B.) What is the maximum amount that Beta Corporation can pay in cash dividends, without impairing its legal capital, if it is headquartered in a U.S. state where capital is defined as the par value of common stock, plus paid in capital in excess of par?

Explanation / Answer

a. Beta Corp can pay $27,000,000 (the value of retained earnings + capital in excess of par) in
a state where capital is defined as the par value of common stock.

b. Beta Corp can pay only $25,000,000 (the value of retained earnings)

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