Question

(a) From the following information, compute Debt-Equity Ratio:
Long Term Borrowings - 2,00,000
Long Term Provisions - 1,00,000
Current Liabilities - 50,000
Non-current-Assets - 3,60,000
Current-Assets - 90,000
(b) The current ratio of X. Ltd is 2 : 1. State with reason which of the following transaction would (i) increase; (ii) decrease or (iii) not change the ratio.
(1) Included in the trade payables was a bills payable of Rs 9,000 which was met on maturity.
(2) Company issued 1,00,000 equity shares of Rs 10 each to the Vendors of machinery purchased.

Answer 1

Debt- Equity Ratio $=\frac{Long-TermDebt}{Shareholde{r}^{\prime }sFunds}$
Total Assets = Total Liabilities + Shareholder's Funds
Total Assets = Current Assets + Non-Current Assets
= 1,80,000 + 7,20,000 = 9,00,000
Total Liabilities = Long Term Borrowings + Long-Term Provisions + Current Liabilities
= 4,00,000 +2,00,000+1,00,000 = 7,00,000
Therefore, Shareholder's funds = Total Assets Total Liabilities
= 9,00,000 7,00,000 = 2,00,000 Long-Term Debt = Long Term Borrowings + Long-term Provisions = 4,00,000+2,00,000 = Rs 6,00,000

Therefore, Debt -equity ratio =$\frac{6,00,000}{2,00,000}=3:1$
(b) Current ratio $=\frac{CurrentAssets}{CurrentLiabilities}$
(1) A bill payable of Rs. 9,000 was met on maturity will affect:
1.Trade Payable will reduce by Rs.9,000
2.Cash will reduce by $Rs.9,000$
Simultaneous decreases in current assets and current liabilities will improve current ratio
Issue of share of Rs.10,00,000 to vendor of machinery will affect the following
1.Increases on the balance of machinery
2.Increase in the amount of share capital
This transaction will neither affect current liabilities nor current assets.Thus ,current ratio will remain unchanged.