Ownclasses

(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 could (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.

Answer

(a) Debt- Equity Ratio = Long term Debt/ Share holder’s fund or Debt/ Equity.
Debt = 200000 + 100000 (borrowings+ provisions) = Rs 3,00,000
Equity = Current Assets + Non Current Assets –debts - Current Liabilities= 90,000+3,60,000-3,00,000—50,000  =   Rs 1,00,000

(b)
(1) A bill payable of Rs 9,000 was met on maturity:
a) Trade Payables will reduce by Rs 9,000 (liability reduced)
b) Cash will reduce by Rs 9,000 (asset reduced)
This simultaneous decrease in both current assets and current liabilities leads to increase in ratio.
(2) Issue of shares of Rs 10,00,000 to vendor of Machinery will affect the following:
Neither Current Assets nor Current Liabilities are changing hence no change in the ratio.