accoutingratio26-27 - commercemine

Question 46:

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 47:

Calculate Debt to Equity Ratio from the following information:

	₹		₹
Fixed Assets (Gross)	8,40,000	Current Assets	3,50,000
Accumulated Depreciation	1,40,000	Current Liabilities	2,80,000
Non-current Investments	14,000	10% Long-term Borrowings	4,20,000
Long-term Loans and Advances	56,000	Long-term Provisions	1,40,000

Answer:

Debt	=	Long Term Borrowings+Long Term Provisions
	=	4,20,000+1,40,000 = ₹5,60,000

Equity	=	Total Assets - Total Debts
	=	(8,40,000 -1,40,000+14,000+56,000+3,50,000) - (4,20,000 -1,40,000 -2,80,000)= ₹2,80,000

Debt to Equity Ratio	=	Debt/Equity
	=	5,60,000/2,80,000=2:1

Question 48:

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)

Question 49:

Balance Sheet had the following amounts as at 31st March, 2021:

	₹			₹
10% Preference Share Capital		5,00,000	Current Assets	12,00,000
Equity Share Capital		15,00,000	Current Liabilities	8,00,000
Securities Premium Reserve		1,00,000	Investments (in other companies)	2,00,000
Reserves and Surplus		4,00,000	Fixed Assets-Cost	60,00,000
Long-term Loan from IDBI @ 9%		30,00,000	Depreciation Written off	14,00,000

Calculate ratios indicating the Long-term and the Short-term financial position of the company.

Answer:

(i) Debt-Equity Ratio is an indicator of Long-term financial health. It shows the proportion of Long-term loan in comparison of shareholders’ Funds.

Debt-Equity Ratio = Long Term Debts/Equity

Debt = Loan from IDBI @ 9% = 30,00,000

Equity = 10% Preference Share Capital + Equity Share Capital + Reserves & Surplus

= 5,00,000 + 15,00,000 + 4,00,000 = 24,00,000

Debt-Equity Ratio = 30,00,000/24,00,000 = 1.25:1

(ii) Current Ratio is an indicator of short-term financial portion. It shows the proportion of Current Assets in comparison of Current Liabilities.
Current Ratio = Current Assets/Current Liabilities

Current Assets = 12,00,000

Current Liabilities = 8,00,000

Current Ratio = 12,00,000/8,00,000 = 1.5:1

Note: In the above question, Securities Premium Reserve is not considered while computing Equity because it is already included in the amount of Reserves and Surplus.

Question 50:

From the following Balance Sheet of ABC Ltd. as at 31st March, 2022, Calculate Debt to Equity Ratio:

Particulars		₹
I. EQUITY AND LIABILITIES
1.Shareholder's Funds
(a) Share Capital:
(i) Equity Share Capital	5,00,000
(ii) 10% Preference Share Capital	5,00,000	10,00,000
(b) Reserves and Surplus		2,40,000

2. Non-Current Liabilities
Long-term Borrowings (Debentures)		2,50,000

3. Current Liabilities :
(a) Trade Payables		4,30,000
(b) Other Current Liabilities		20,000
(c) Short-term Provisions: Provision for Tax		3,00,000
Total		22,40,000
II. ASSETS
1. Non-Current Assets
Fixed Assets:
(i) Tangible Assets		6,40,000
(ii) Intangible Assets		1,00,000

2. Current Assets
(a) Inventories		7,50,000
(b) Trade Receivables		6,40,000
(c) Cash and Cash Equivalents		1,10,000
Total		22,40,000