Question

Assuming that Proprietary Ratio is 0.6 : 1, state giving reasons, whether the ratio will increase, decrease or will not change in each one of the following cases:

(i) Issue of new equity shares for cash.

(ii) Issue of equity shares against purchase of machinery.

(iii) Issue of debentures against purchase of machiney.

(iv) Redemption of debentures for cash.

(v) Conversion of debentures into preference shares.

(vi) Buy-back of its own shares by a company.

(vii) Purchase of a fixed asset for cash.

(viii) Purchase of a fixed asset on long-term deferred payment basis.

(ix) Sale of a fixed asset costing Rs. 1,00,000 for Rs. 80,000.

(x) Sale of a fixed asset costing Rs. 2,00,000 for Rs. 2,50,000.

(xi) Issue of Bonus Shares.

Answer 1

$\text{Proprietary Ratio}=\frac{\text{Shareholder's Funds}}{\text{Total Assets}}$

$\begin{array}{ccc}\text{Sr.}& \text{Effect on}& \text{Reasons}\\ \text{No.}& \text{Proprietary}& \\ & \text{Ratio}& \\ \text{(i)}& \text{Increase}& \text{Shareholder's Funds as well as total assets are increased by the same amount}.\\ \text{(ii)}& \text{Increase}& \text{Shareholder's Funds as well as total assets are increased by the same amount}.\\ \text{(iii)}& \text{Decrease}& \text{Shareholder's Funds remain unchanged but total assets have increased}.\\ \text{(iv)}& \text{Increase}& \text{Shareholder's Funds remain unchanged but total assets have decreased}.\\ \text{(v)}& \text{Increase}& \text{Shareholder's Funds have increased but total assets remain unchanged}.\\ \text{(vi)}& \text{Decrease}& \text{Shareholder's Funds as well as total assets are decreased by the same amount}.\\ \text{(vii)}& \text{No Change}& \text{Neither the Shareholder's Funds nor the total assets are affected since it is a conversion of one asset (cash) into another asset (fixed asset)}.\\ \text{(viii)}& \text{Decrease}& \text{Shareholder's funds remain unchanged but total assets have increased}.\\ \text{(ix)}& \text{Decrease}& \text{Shareholder's Funds have decreased by the amount of loss on sale i.e., Rs. 20,000 and total assets have also decreased by Rs.20,000}.\\ \text{(x)}& \text{Increase}& \text{Shareholder's Funds have increased by the amount of profit on sale i.e., Rs. 50,000 and total assets have also increased by Rs. 50,000.}\\ \text{(xi)}& \text{No Change}& \text{Neither the Shareholder's Funds nor the total assets are affected since it is a conversion of reserve \& surplus into share capital.}\end{array}$