Premium on the issue of shares
Profit prior to incorporation
Equitable dividend reserve
Profit on sale of fixed assets
Answer is Right!
Answer is Wrong!
The correct answer is: D. Profit on sale of fixed assets.
A capital reserve is a reserve that is created from capital profits, such as the premium on the issue of shares or the profit prior to incorporation. It is not used for the ordinary purposes of the business, but is kept aside for special purposes, such as the purchase of fixed assets or the payment of dividends.
A profit on the sale of fixed assets is not a capital profit, as it is not derived from the sale of capital assets. It is a revenue profit, and should be treated as such.
Here is a brief explanation of each option:
- Premium on the issue of shares: This is the amount that is received by a company when it issues shares at a price above their nominal value. It is a capital profit, and is treated as such.
- Profit prior to incorporation: This is the profit that a company makes before it is incorporated. It is a capital profit, and is treated as such.
- Equitable dividend reserve: This is a reserve that is created to provide for future dividends. It is a capital reserve, and is treated as such.
- Profit on sale of fixed assets: This is the profit that a company makes when it sells fixed assets. It is a revenue profit, and should be treated as such.