Question

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:

1) Obtained a loan from bank Rs 2, 00,000 payable after five years.

2) Purchased machinery for cash Rs 75,000

3) Redeemed 5% redeemable preference shares Rs 1,00,000

Issued equity shares to the vendors of machinery purchased for Rs 4,00,000.

Answer 1

Proprietary Ratio of M Ltd. 0s.80: 1

Proprietary Ratio = `"Proprietor's Funds"/"Total Assets"`

Transactions	Effects
Obtained a loan from bank Rs 2,00,000 payable after 5 years	Decrease, The total assets would increase with the amount of loan raised and proprietor’s funds remains the same
Purchased machinery for cash Rs 75,00	No Change, Total Assets will increase and decrease by the same amount :
Redeemed 5% Redeemable preference shares Rs 1,00,000	Decrease, Proprietor’s Funds and Total Assets both will decrease by the same amount but the percentage the change would be more on Proprietor’s Fund already in ratio 0.80: 1
Issued equity shares to vendors of machinery purchased for Rs 4,00,000	Increase, Even though both Proprietor’s Funds and Total Assets both will increase by the same amount but the percentage change would be more in Proprietor’s Fund