Question 46: King Ltd. has Current Ratio of 2.5:1. Its Working Capital is `1,20,000. Total Assets are of `3,80,000 and Total Debt of `2,80,000.
Calculate Debt to Equity Ratio.
Answer:
Current Liabilities=x
Current Assets = 2.5x
Working Capital =1,20,000
Debt to Equity Ratio = Debt÷Equity Ratio
Debt to Equity Ratio = 2,00,000/1,00,000=2/1
Debt to Equity Ratio = 2:1
Working note:
Working Capital= Current Assets-- Current Liabilities
1,20,000=2.5x-x
1,20,000=1.5x
X=1,20,000/1.5=80,000
Debt (Non- Current Liabilities)= Total Debt- Current Liabilities
2,00,000=2,80,000-80,000
Equity= Total Liabilities- Total Debt
1,00,000=3,80,000 - 2,80,000.
Question 47: Monica Ltd. has Quick Ratio of 1.5: 1 Its Working Capital is `1,20,000 and its inventories are of ` 80,000. Total Assets of ` 3,80,000 and Total Debts of `2,80,000.
Calculate Debt to Equity Ratio.
(Ans.: Debt to Equity Ratio =2:1]
Answer:
Debt to Equity Ratio = Debt÷Equity Ratio
Debt to Equity Ratio = 2,00,000/1,00,000=2/1
Debt to Equity Ratio = 2:1
Working note:
Equity = Total Assets - Total Debts
Equity = ` 3,80,000 - ` 2,80,000
Debts (NCL) = Total Debts – Current Liabilities
Debts (NCL) = ` 2,80,000 - ` 80,000 = 2,,00,000
Quick ratio = Quick Assets/ Current Liabilities
Quick ratio = Current Assets – 80,000 / Current Liabilities
1.5 = Current Assets – 80,000 / Current Liabilities
1.5 Current Liabilities = Current Assets - 80,000
Current Assets = 1.5 Current Liabilities + 80,000
Working Capital= Current Assets - Current Liabilities
1,20,000 = Current Assets - Current Liabilities
1,20,000 = 1.5 Current Liabilities + 80,000 - Current Liabilities
0.5 Current Liabilities = 40,000
Current Liabilities = 40,000×0.5 =80,000
Question 48:
When Debt to Equity Ratio is 2, state giving reason, whether this ratio will
increase or decrease or will have no change in each of the following cases:
(i) Sale of Land (Book value `4,00,000) for `5,00,000;
(ii) Issue of Equity Shares for the purchase of Plant and Machinery worth `10,00,000;
(iii) Issue of Preference Shares for redemption of 13% Debentures, worth `10,00,000.
Answer:
Debt-Equity Ratio = 2:1
Let Long-term loan = ` 20,00,000
Shareholders’ Funds = ` 10,00,000
(i) Sale of Land (Book Value ` 4,00,000) for ` 5,00,000- Decrease
Reason: This transaction will result increase in Shareholders’ Funds by ` 1,00,000 as profit on sale of Land.
Shareholders’ Funds after adjusting profit on sale of land = 10,00,000 + 1,00,000 = ` 11,00,000
Debt equity ratio= 20,00,000/11,00,000=1.81:1
(ii) Issue of Equity share for the purchase of plant and Machinery worth ` 10,00,000- Decrease
Reason: This transaction will increase the amount of Shareholders Fund by ` 10,00,000 in the form of equity shares and have no effect on Long-term Loans.
Debt equity ratio= Long-term Debt /equity=20,00,000/20,00,000=1:1
(iii) Issue of preference Shares for redemption of 13% Debentures worth ` 10,00,000- Decrease
Reason: This transaction will lead to decrease in Long-term Loan by ` 10,00,000 in the form of redemption of debentures and increase in Shareholders’ Funds with the same amount in the form of Preference Shares.
Debt equity ratio= Long-term Debt /equity=20,00,000-10,00,000/10,00,000+10,00,000=5:1
Question 49:
Debt to Equity Ratio of a company is 0.5:1. Which of the following suggestions would increase, decrease or not change it:
|
(i) Issue of Equity Shares: |
(ii) Cash received from debtors: |
|
(iii) Redemption of debentures; |
(iv) Purchased goods on Credit? |
Answer:
Debt Equity Ratio = 0.5:1
Let Long- term Loan be = ` 5,00,000
Shareholders’ Funds = ` 10,00,000
Debt equity ratio= Debt /equity=5,00,000/10,00,000=0.5:1
(i) Issue of Equity shares- Decrease
Reason: Issue of equity shares results in increase in Shareholders’ Funds in the form of equity shares but there will be no change in Long-term Loan.
Example: Issue of equity share ` 5,00,000
Shareholders’ Funds after issue of equity shares = 10,00,000 + 15,00,000
= ` 15,00,000
Debt equity ratio= Debt /equity=5,00,000/15,00,000=0.33:1
(ii) Cash received from Debtors- No Change
Reason: Cash received from debtors will increase one current asset in the form of cash and decrease other asset in the form of debtors. This transaction will have no effect on Long-term Loan and Shareholders’ Funds.
(iii) Redemption of Debentures- Decrease
Reason: This transaction will result decrease in Long-term Loans in the form of reduction in debtors and no change in Shareholders’ Funds.
Example: Redemption of Debentures `2,00,000
Long-term Loan = 5,00,000 − 2,00,000 = 3,00,000
Debt equity ratio after redemption of debenture = Debt /equity=3,00,000/10,00,000=0.3:1
(iv) Purchased of goods on Credit- No Change
Reason: Neither Long-term loan nor share holders’ funds will be affected by this transaction because purchase of goods results no change in Long-term Loan and Shareholders’ Funds.
Question 50:
Assuming That the Debt to Equity Ratio is 2 : 1, state giving reasons, which
of the following transactions would (i) increase; (ii) Decrease; (iii) Not
alter Debt to Equity Ratio:
(i) Issue of new shares for cash.
(ii) Conversion of debentures into equity shares
(iii) Sale of a fixed asset at profit.
(iv) Purchase of a fixed asset on long-term deferred payment basis.
(v) Payment to creditors.
Answer:
Let’s take Debt and Equity as ` 2,00,000 and `
1,00,000
Debt to Equity Ratio=Debt/Equity
=2,00,000/1,00,000=2:1
(i) Issue of new shares for cash (say ` 50,000)
Debt to Equity Ratio =2,00,000/1,00,000+50,000=1.33:1(Decrease)
(ii) Conversion of debentures into equity shares (say `
50,000)
Debt to Equity Ratio =2,00,000/1,00,000+50,000=1.33:1(Decrease)
(iii) Sale of a fixed asset at profit (say ` 50,000 profit)
Debt to Equity Ratio =2,00,000/1,00,000+50,000=1.33:1(Decrease)
(iv) Purchase of fixed asset on long term payment basis (say `
50,000)
Debt to Equity Ratio =2,00,000+50,000/1,00,000=2.5:1(Increase)
(v) Payment to creditors (say ` 50,000)
Debt to Equity Ratio =2,00,000/1,00,000=2:1(No Change)
Ts Grewal Solution 2023-2024
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Class 12 / Volume – I
Chapter 3 – Accounting Ratio