1
You visited us 1 times! Enjoying our articles? Unlock Full Access!
Question

# 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.

Open in App
Solution

## Let’s take Debt and Equity as Rs 2,00,000 and Rs 1,00,000 $\begin{array}{l}\mathrm{Debt}\mathrm{}\mathrm{to}\mathrm{}\mathrm{Equity}\mathrm{}\mathrm{Ratio}=\frac{\mathrm{Debt}}{\mathrm{Equity}}\\ \text{=}\frac{2,00,000}{1,00,000}=2:1\end{array}$ (i) Issue of new shares for cash (say Rs 50,000) $\text{Debt to Equity Ratio =}\frac{2,00,000}{1,00,000+50,000}=1.33:\text{1(Decrease}\right)$ (ii) Conversion of debentures into equity shares (say Rs 50,000) $\text{Debt to Equity Ratio =}\frac{2,00,000}{1,00,000+50,000}=1.33:\text{1(Decrease}\right)$ (iii) Sale of a fixed asset at profit (say Rs 50,000 profit) $\text{Debt to Equity Ratio =}\frac{2,00,000}{1,00,000+50,000}=1.33:\text{1(Decrease}\right)$ (iv) Purchase of fixed asset on long term payment basis (say Rs 50,000) $\text{Debt to Equity Ratio =}\frac{2,00,000+50,000}{1,00,000}=2.5:\text{1(Increase}\right)$ (v) Payment to creditors (say Rs 50,000) $\text{Debt to Equity Ratio =}\frac{2,00,000}{1,00,000}=2:1\left(\text{No Change)}$

Suggest Corrections
10
Join BYJU'S Learning Program
Related Videos
Other Aspects of Realisation
ACCOUNTANCY
Watch in App
Join BYJU'S Learning Program