Detailed Answer
(b) Dividends that are based on funds other than retained
earnings are considered to be liquidating dividends. The
cash dividend declared of $400,000 is first assumed to be a return
on capital for the distribution of the retained earnings balance of
$300,000. The excess $400,000 dividend – $300,000 RE =
$100,000 is considered to be a return of capital or a liquidating
dividend rather than a return on capital. Note that the amount of
liquidating dividend also equals the balance in accumulated depletion.
Companies in the extractive industries may pay dividends
equal to the accumulated income and depletion.