12th | Accounting Ratio | Question No. 166 To 170 | Ts Grewal Solution 2023-2024

Question 166:

Net Profit after interest but before tax ` 1,40,000; 15% Long-term Debts 4,00,000; Shareholders' Funds `2,40,000; Tax Rate 50%. Calculate Return on Capital Employed.

Answer:

Return on Capital Employed = Profit Before interest, tax and dividend/ Capital Employed×100

Return on Capital Employed = 2,00,000/6,40,000×100=31.25%

Working Note:

Interest =4,00,000×15/100=60,000

Profit Before interest= Profit after interest + Interest

Profit Before interest=1,40,000+60,000=2,00,000

Capital Employed= Long-term Debts + Shareholders' Funds

Capital Employed= 4,00,000+2,40,000=6,40,000

Question 167:

Y Ltd.'s profit after interest and tax was ` 1,00,000. Its Current Assets were ` 4,00,000; Current Liabilities ` 2,00,000; Fixed Assets ` 6,00,000 and 10% Long-term Debt ` 4,00,000. The rate of tax was 20%. Calculate 'Return on Investment' of Y Ltd.

Answer:

Return on Investment = (Net Profit before Interest, Tax and Dividend/ Capital Employed × 100)
Let Profit before tax be ` 100
Tax = ` 20
Profit after tax = ` (100 – 20) = ` 80
If Profit after tax is ` 80 then profit before tax is = ` 100
If Profit after tax is ` 1,00,000 then profit before tax is = ` (1,00,000 × 100/80) = ` 1,25,000
Interest on long-term borrowings = ` (4,00,000 × 10/100)= ` 40,000
Profit after interest and Tax = ` (1,25,000 + 40,000) = ` 1,65,000
Capital Employed = Fixed Assets+ Current Assets – Current Liabilities
= ` (6,00,000 + 4,00,000 – 2,00,000) = ` 8,00,000
Return on Investment = (1,65,000/8,00,000 × 100 )= 20.625% or 20.63% (approx.)

Question 168:

Calculate Return on Investment (ROI) from the following details: Net Profit after Tax ` 6,50,000; Rate of Income Tax 50%; 10% Debentures of ` 100 each ` 10,00,000; Fixed Assets at cost ` 22,50,000; Accumulated Depreciation on Fixed Assets up to date ` 2,50,000; Current Assets ` 12,00,000; Current Liabilities ` 4,00,000.

Answer:

Net Fixed Assets = Fixed Assets (at cost) − Accumulated Depreciation

= 22,50,000 − 2,50,000 = 20,00,000

Capital Employed = Net Fixed Assets + Current Assets − Current Liabilities

= 20,00,000 + 12,00,000 − 4,00,000

= 28,00,000

Interest on 10% Debentures = 10% of 10,00,000 = 1,00,000

Let Profit before Tax be = x

Profit after Tax = Profit Before Tax − Tax

Tax Rate = 50%

∴ Tax = 0.5 x

x − 0.5 x = 6,50,000

x = 13,00,000

Net Profit before Tax = x = 13,00,000

Profit before Interest and Tax = Profit before Tax + Interest on Long-term Debt

= 13,00,000 + 1,00,000

= 14,00,000

Return on Investment = Net profit Before Interest and Tax ×100/ Capital Employed

Return on Investment = 14,00,000 ×100 / 28,00,000=50%

Question 169:

From the following information, calculate Return on Investment (or Return on Capital Employed):


Particulars		`
Share Capital		5,00,000
Reserves and Surplus		2,50,000
Net Fixed Assets		22,50,000
Non-current Trade Investments		2,50,000
Current Assets		11,00,000
10% Long-term Borrowings		20,00,000
Current Liabilities		8,50,000
Long-term Provision		NIL

Answer:

Net Profit before tax = 6,00,000
Net Profit before interest, tax and dividend = Net Profit before tax + Interest on long-term borrowings
= 6,00,000 + 10% of 20,00,000 = 6,00,000 + 2,00,000 = 8,00,000

Capital Employed = Share Capital + Reserves and Surplus + Long-term borrowings
= 5,00,000 + 2,50,000 + 20,00,000 = 27,50,000

Return on Investment = Net profit Before Interest, Tax and Dividend ×100/ Capital Employed

=8,00,000×100/27,50,0000

=29.09%

Question 170:

State with reason whether the following transactions will increase, decrease or not change the 'Return on Investment' Ratio:
(i) Purchase of machinery worth `10,00,000 by issue of equity shares.
(ii) Charging depreciation of `25,000 on machinery.
(iii) Redemption of debentures by cheque `2,00,000.
(iv) Conversion of 9% Debentures of `1,00,000 into equity shares.

Answer:

Transaction	Impact
Purchase of machinery worth ` 10,00,000 by issue of equity shares.	Issue of shares will lead to an increase in the capital employed by ` 10,00,000.But profit remains intact and so there will be a decline in the return on investment ratio.
Charging depreciation of ` 25,000 on machinery.	Simultaneous decrease in profits and capital employed by ` 25,000 will lead to a decline in return on investment ratio.
Redemption of debentures by cheque ` 2,00,000.	Redemption of debentures will lead to a decrease in the capital employed by ` 2,00,000. But profit remains intact and so there will be an increase in the return on investment ratio.
Conversion of 9% Debentures of ` 1,00,000 into equity shares.	Decrease in debentures and increase in share capital causing a simultaneous increase and decrease in capital employed will leave the return on investment ratio unchanged.