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.

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Solution

Transaction Implication
Obtained a loan from bank Rs 2,00,000 payable after five years. Total assets are increasing by 2,00,000 (as cash is coming in) but shareholders' funds remain intact, so proprietary ratio will decrease.
Purchased machinery for cash Rs 75,000. Total assets are increasing and decreasing by 75,000 simultaneously (as cash is going out and machinery is coming in), hence both numerator and denominator remain intact, therefore proprietary ratio will not change.
Redeemed 5% redeemable preference shares Rs 1,00,000. Both shareholders' funds and total assets decrease by 1,00,000 simultaneously and proprietary ratio decreases.
Issued equity shares to the vendors of machinery purchased for Rs 4,00,000.
Both shareholders' funds and total assets increase by 4,00,000 simultaneously and proprietary ratio improves.

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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.

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. (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.

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.

Q. Pass necessary journal entries for the following transactions in the books of Rajan Ltd :
(a) Rajan Ltd. purchased machinery of Rs 7,20,000 from Kundan Ltd. The payment was made to Kundan Ltd. by issue of equity shares of Rs 100 each at 10% discount.
(b) Rajan Ltd purchased a running business from Vikas Ltd. for a sum of Rs 2,50,000 payable as Rs 2,20,000 in fully paid equity shares of Rs 10 each and balance by a bank draft. The assets and liabilities consisted of the following :
Plant & Machinery Rs 90,000; Building Rs 90,000; Sundry Debtors Rs 30,000; Stock Rs 50,000; Cash Rs 20,000; Sundry Creditors Rs 20,000.

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Transaction	Implication
Obtained a loan from bank Rs 2,00,000 payable after five years.	Total assets are increasing by 2,00,000 (as cash is coming in) but shareholders' funds remain intact, so proprietary ratio will decrease.
Purchased machinery for cash Rs 75,000.	Total assets are increasing and decreasing by 75,000 simultaneously (as cash is going out and machinery is coming in), hence both numerator and denominator remain intact, therefore proprietary ratio will not change.
Redeemed 5% redeemable preference shares Rs 1,00,000.	Both shareholders' funds and total assets decrease by 1,00,000 simultaneously and proprietary ratio decreases.
Issued equity shares to the vendors of machinery purchased for Rs 4,00,000.	Both shareholders' funds and total assets increase by 4,00,000 simultaneously and proprietary ratio improves.