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✦ FREE LEARNING — CLASS 11 & 12 — CBSE · PSEB — ACCOUNTS · ECONOMICS · BST ✦
When the Debt to Equity Ratio is 2, state, giving reasons, whether this ratio will increase, decrease, or 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.
Debt-Equity Ratio = 2:1. Assume Long-term Loan (Debt) = ₹20,00,000 and Shareholders’ Funds (Equity) = ₹10,00,000.
(i) Sale of Land (Book Value ₹4,00,000) for ₹5,00,000 — Decrease
Reason: The profit of ₹1,00,000 on sale increases Shareholders’ Funds; Debt is unaffected.
Shareholders’ Funds after adjusting profit = 10,00,000 + 1,00,000 = ₹11,00,000
New Debt to Equity Ratio = 20,00,000 ÷ 11,00,000 = 1.82:1
(ii) Issue of Equity Shares for the purchase of Plant and Machinery worth ₹10,00,000 — Decrease
Reason: Shareholders’ Funds increase by ₹10,00,000 (new equity shares issued); Long-term Loans are unaffected.
New Debt to Equity Ratio = 20,00,000 ÷ (10,00,000 + 10,00,000) = 20,00,000 ÷ 20,00,000 = 1:1
(iii) Issue of Preference Shares for redemption of 13% Debentures worth ₹10,00,000 — Decrease
Reason: Long-term Loans decrease by ₹10,00,000 (Debentures redeemed) while Shareholders’ Funds increase by the same amount (Preference Shares issued).
New Debt to Equity Ratio = (20,00,000 − 10,00,000) ÷ (10,00,000 + 10,00,000) = 10,00,000 ÷ 20,00,000 = 0.5:1
Accounting & Commerce Educator
Sarbjit Singh holds a B.Com and M.Com degree and has over 12 years of teaching experience in double entry bookkeeping, financial accounting, and business studies.
This guide covers "T.S. Grewal Class 12 Vol 3 Chapter 4 Q.46 - Accounting Ratios", focusing on key definitions, step-by-step concepts, applications, and revision guidelines relevant to Chapter 4 - Accounting Ratios.
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