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.

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Solution

Transaction Impact

Obtained a loan of Rs 5,00,000 from State Bank of India payable after five years. Total assets increase by 5,00,000 (as cash is coming in). However, since shareholders' funds remain unchanged, therefore proprietary ratio will decrease.

Purchased machinery of Rs 2,00,000 by cheque. Total assets are increasing and decreasing by 2,00,000 simultaneously (as cash is going out and machinery is coming in). Thus, both numerator and denominator remain unchanged and so proprietary ratio will not change.

Redeemed 7% Redeemable Preference Shares Rs 3,00,000. Both shareholders' funds and total assets decrease by 3,00,000 simultaneously and so proprietary ratio will decrease.

Issued equity shares to the vendor of building purchased for Rs 7,00,000. Both shareholders' funds and total assets increase by 7,00,000 simultaneously and so proprietary ratio will improve.

Redeemed 10% redeemable debentures of Rs 6,00,000 Total assets decrease by 6,00,000 (as cash is going out). However, since shareholders' funds remain unchanged, therefore proprietary ratio will improve.

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Similar questions

Q. The proprietary ratio of M. Ltd. is

0.80 : 1

.
State with reasons whether the following transactions will increase, decrease or not change the proprietary ratio:
(i) Obtained a loan from bank Rs 2,00,000 payable after five years.
(ii) Purchased machinery for cash Rs 75,000.
(iii) Redeemed 5% redeemable preference shares Rs 1,00,000.
(iv) Issued equity shares to the vendors of machinery purchased for Rs 4,00,000.

Q. 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.

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. Pass necessary Journal entries for the issue of debentures in the following cases:
(a) ₹ 40,000; 12% Debentures of ₹ 100 each issued at a premium of 5% redeemable at par.
(b) ₹ 70,000; 12% Debentures of ₹ 100 each issued at a premium of 5% redeemable at ₹ 110.

Q. Pass necessary Journal entries for the issue of Debentures in the following cases:
(a) ₹ 40,000; 15% Debentures of ₹ 100 each issued at a discount of 10% redeemable at par.
(b) ₹ 80,000; 15% Debentures of ₹ 100 each issued at a premium of 10% redeemable at a premium of 10%.

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Transaction	Impact
Obtained a loan of Rs 5,00,000 from State Bank of India payable after five years.	Total assets increase by 5,00,000 (as cash is coming in). However, since shareholders' funds remain unchanged, therefore proprietary ratio will decrease.
Purchased machinery of Rs 2,00,000 by cheque.	Total assets are increasing and decreasing by 2,00,000 simultaneously (as cash is going out and machinery is coming in). Thus, both numerator and denominator remain unchanged and so proprietary ratio will not change.
Redeemed 7% Redeemable Preference Shares Rs 3,00,000.	Both shareholders' funds and total assets decrease by 3,00,000 simultaneously and so proprietary ratio will decrease.
Issued equity shares to the vendor of building purchased for Rs 7,00,000.	Both shareholders' funds and total assets increase by 7,00,000 simultaneously and so proprietary ratio will improve.
Redeemed 10% redeemable debentures of Rs 6,00,000	Total assets decrease by 6,00,000 (as cash is going out). However, since shareholders' funds remain unchanged, therefore proprietary ratio will improve.