Cash Dividends

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Both creditors and shareholders are interested in the amount of assets that can be distributed as dividends. The paid-in share capital is not available for distribution as dividends. This helps protect creditors by preventing shareholders from withdrawing assets as dividends to the point where remaining assets become insufficient to pay creditors. For example, assume total assets are $40,000; total liabilities $39,000; and total shareholders’ equity $1,000, consisting of $900 in common shares and $100 of retained earnings. The maximum dividends that could be declared in this situation is $100, the balance in retained earnings.