Question

Assertion (A): If Current Ratio is 2 : 1, repayment of debentures due for redemption for ₹ 1,00,000 will result in increase in Current Ratio.

Reason (R): Debentures which are redeemable within 12 months from the date of Balance Sheet are shown as Current Liabilities. As such, redemption of debentures reduces both the Current Assets as well as Current Liabilities resulting in increase in Current Ratio.

In the context ofthe above two statements, which of the following is correct?

Options

• (A) and (R) both are correct and (R) correctly explains (A).

• Both (A) and (R) are correct but (R) does not explain (A).

• Both (A) and (R) are incorrect.

• (A) is correct but (R) is incorrect.

Answer 1

(A) and (R) both are correct and (R) correctly explains (A).

Explanation:

Debentures redeemable within 12 months are reported as current liabilities. When they are repaid, both current assets (cash) and current liabilities are reduced by the same amount. Because the current ratio is already 2 : 1 (higher than 1), reducing liabilities has a greater proportional effect than reducing assets, resulting in a rise in the current ratio. As a result, both the assertion and the reason are correct, and the reason provides an accurate explanation for the assertion.