12th | Accounting Ratios | Question No. 56 To 60 | Ts Grewal Solution 2022-2023

Calculate Proprietary Ratio, if Total Assets to Debt Ratio is 2: 1. Debt is `5,00,000. Equity Shares Capital is 0.5 times of debt. Preference Shares Capital is 25% of equity share capital. Net profit before tax is `10,00,000 and rate of tax is 40%.

(CBSE Sample Paper 2020)

Total Assets to Debt Ratio is 2: 1

Debt = `5,00,000

Total Assets = 10,00,000 (5,00,000×2)

Equity Shares Capital is 0.5 times of debt

Equity Shares Capital is(0.5×5,00,000)=2,50,000

Preference Shares Capital is 25% of equity share capital

2,50,000×25/100=62,500

Total Share Capital = Equity Shares Capital+ Preference Shares Capital

Total Share Capital = 2,50,000+62,500

Total Share Capital = 3,12,500

Rate of tax is 40%

Tax is 4,00,000 (40% of 10,00,000)

Surplus (Net Profit after Tax)=10,00,000-4,00,000

Surplus (Net Profit after Tax)=6,00,000

Share Holders’ Fund= Total Share Capital+ Surplus

Share Holders’ Fund= 3,12,500+ 6,00,000

Share Holders’ Fund= 3,12,500+ 6,00,000

Share Holders’ Fund= 9,12,500

Proprietary Ratio= Share Holders’ Fund/Total Assets

Proprietary Ratio= 9,12,500/10,00,000

Proprietary Ratio 0.912: 1 or 91.2%.

 

State with reason, whether the Proprietary Ratio will improve, decline or will not change because of the following transactions if Proprietary Ratio is 0.8 : 1:

(i) Obtained a loan of  ` 5,00,000 from State Bank of India payable after five years.
(ii) Purchased machinery of  ` 2,00,000 by cheque.
(iii) Redeemed 7% Redeemable Preference Shares  ` 3,00,000.
(iv) Issued equity shares to the vendor of building purchased for  ` 7,00,000.
(v) Redeemed 10% redeemable debentures of  ` 6,00,000.

Transaction	Impact
Obtained a loan of  ` 5,00,000 from State Bank of India payable after five years.	Total assets increase by 5,00,000 (as cash is coming in). However, since shareholders' funds remain unchanged, therefore proprietary ratio will decrease.
Purchased machinery of  ` 2,00,000 by cheque.	Total assets are increasing and decreasing by 2,00,000 simultaneously (as cash is going out and machinery is coming in). Thus, both numerator and denominator remain unchanged and so proprietary ratio will not change.
Redeemed 7% Redeemable Preference Shares  ` 3,00,000.	Both shareholders' funds and total assets decrease by 3,00,000 simultaneously and so proprietary ratio will decrease.
Issued equity shares to the vendor of building purchased for  ` 7,00,000.	Both shareholders' funds and total assets increase by 7,00,000 simultaneously and so proprietary ratio will improve.
Redeemed 10% redeemable debentures of  ` 6,00,000	Total assets decrease by 6,00,000 (as cash is going out). However, since shareholders' funds remain unchanged, therefore proprietary ratio will improve.

 

 

 From the following information, calculate:

(a) Proprietary Ratio

(b) Debt to Equity Ratio; and

(c) Total Assets to Debt Ratio.

Current Assets	`40,00,000	Current Liabilities	`20,00,000
Long-term Borrowings	`15,00,000	Long-term Provisions	`25,00,000
Non-current Assets	`40,00,000

(a)   Proprietary Ratio

Proprietary Ratio= Share Holders’ Fund/Total Assets

Proprietary Ratio =20,00,000×100/80,00,000

Proprietary Ratio =25%

 

(b)   Debt to Equity Ratio

Debt to Equity Ratio= Debt/Equity

Debt to Equity Ratio= 40,00,000/20,00,000

Debt to Equity Ratio= 2/1=2:1

 

(c)   Total Assets to Debt Ratio

Total Assets to Debt Ratio= Total Assets/Debt

Total Assets to Debt Ratio= 80,00,000/40,00,000

Total Assets to Debt Ratio= 2/1=2:1

 

Working Notes:

1.      Total Assets=Current Assets+ Non-Current Assets

Total Assets=40,00,000+40,00,000

Total Assets=80,00,000

2.      Share holders’ fund= Total Assets - Current Liabilities - Long-term Provisions - Long-term Borrowings

Share holders’ fund=80,00,000-20,00,000-25,00,000-15,00,000

Share holders’ fund=20,00,000

From the following information, calculate:

	(a)	Proprietary ratio;
	(b)	Debt to equity ratio; and
	(c)	Total assets to debts ratio
Current Debt Capital employed			`18,00,000 `15,00,000	Current Assets Working Capital		`7,50,000 `1,50,000

Proprietary ratio=shareholders’ fund/total asset × 100

Proprietary ratio=3,00,000/21,00,000×100=14.29%

 

Total asset= capital employed + current liability

21,00,000= 15,00,000 + 6,00,000

 

Current liability= current assets - working capital

6,00,000= 7,50,000 -1,50,000

 

Shareholders' fund= capital employed- non-current liabilities

3,00,000= 15,00,000- 12,00,000

 

Debt = total debts- current liabilities

12,00,000 =18,00,000- 6,00,000

 

(b) Debt equity ratio

Debt to equity ratio= debt/equity

Debt to equity ratio =12,00,000/3,00,000

Debt to equity ratio =4/1

 

(c)

Total asset to debt ratio= total asset/ Debt

Total asset to debt ratio=21,00,000/12,00,000

Total asset to debt ratio=1.75:1

 

If Net Profit before Interest and Tax is `10,00,000 and interest on Long-term Funds is  `2,00,000, find Interest Coverage Ratio.