Question 36 Chapter 4 of +2-B - T.S. Grewal 12 Class

Question 36 Chapter 4 of +2-B

Table of Contents

The solution of Question 36 Chapter 4 of +2-B: –

T.S. Grewal’s Double Entry Book Keeping +2 (Vol. I: Accounting for Not-for-Profit Organizations and Partnership Firms)

T.S. Grewal’s Double Entry Book Keeping (Vol. II: Accounting for Companies)

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

The solution of Question 36 Chapter 4 of +2-B: –


Transactions	Impact on Current Ratio	Reason
Sales of Land (Book value Rs. 4,00,000) for Rs. 5,00,000	Decrease	Sale of Land at a profit of Rs. 1,00,000 will increase Shareholder’s Funds. Hence, Debt to Equity Ratio will decrease.
(ii) Issue of Equity Shares for the purchase of Plant and Machinery worth Rs. 10,00,000	Decrease	Issue of Equity Shares for the purchase of Plant and machinery will increase Shareholders’ Funds, hence the ratio will decrease.
(iii) Issue of Preference Share for the redemption of 13% Debentures, worth Rs. 10,00,000.	Decrease	Total Long-term Debts are not affected (because debentures redeemed are Current Liabilities) but total Shareholders’ Funds are increased by the amount of Rs. 10,00,000, hence the ratio will decrease