State with reason whether the following transactions will increase, decrease or not change the 'Return on Investment' Ratio:
(i) Purchase of machinery worth ₹10,00,000 by issue of equity shares.
(ii) Charging depreciation of ₹25,000 on machinery.
(iii) Redemption of debentures by cheque ₹2,00,000.
(iv) Conversion of 9% Debentures of ₹1,00,000 into equity shares.

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Solution

Transaction Impact

Purchase of machinery worth Rs 10,00,000 by issue of equity shares. Issue of shares will lead to an increase in the capital employed by Rs 10,00,000.But profit remains intact and so there will be a decline in the return on investment ratio.

Charging depreciation of Rs 25,000 on machinery. Simultaneous decrease in profits and capital employed by Rs 25,000 will lead to a decline in return on investment ratio.

Redemption of debentures by cheque Rs 2,00,000. Redemption of debentures will lead to a decrease in the capital employed by Rs 2,00,000. Butprofit remains intact and so there will be an increase in the return on investment ratio.

Conversion of 9% Debentures of Rs 1,00,000 into equity shares. Decrease in debentures and increase in share capital causing a simultaneous increase and decrease in capital employed will leave the return on investment ratio unchanged.

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Similar questions

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.

Q. 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.

Q. When Debt to Equity Ratio is 2, state giving reason, whether this ratio will increase or decrease or will have no change in each of the following cases:
(i) Sale of Land (Book value ₹4,00,000) for ₹5,00,000; (ii) Issue of Equity Shares for the purchase of Plant and Machinery worth ₹10,00,000; (iii) Issue of Preference Shares for redemption of 13% Debentures, worth ₹10,00,000.

Q. 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.

The Debt Equity ratio is 3. What will be the impact on the following transactions, and find out the increase, decrease or no change in the ratio.

(i) Buy back of equity shares.

(ii) Purchase of a building on a deferred payment basis.

(iii) Issued shares in consideration of purchase of a machinery.

(iv) Debentures matured but not paid.

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Transaction	Impact
Purchase of machinery worth Rs 10,00,000 by issue of equity shares.	Issue of shares will lead to an increase in the capital employed by Rs 10,00,000.But profit remains intact and so there will be a decline in the return on investment ratio.
Charging depreciation of Rs 25,000 on machinery.	Simultaneous decrease in profits and capital employed by Rs 25,000 will lead to a decline in return on investment ratio.
Redemption of debentures by cheque Rs 2,00,000.	Redemption of debentures will lead to a decrease in the capital employed by Rs 2,00,000. Butprofit remains intact and so there will be an increase in the return on investment ratio.
Conversion of 9% Debentures of Rs 1,00,000 into equity shares.	Decrease in debentures and increase in share capital causing a simultaneous increase and decrease in capital employed will leave the return on investment ratio unchanged.