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Question
Assertion (A): Redemption of debentures will not affect the Debt-Equity Ratio.
Reason (R): Debentures to be redeemed are Current Liabilities.
In the context of the above two statements, which option is correct?
Options
Assertion (A) and Reason (R) are correct, but Reason (R) is not the correct explanation of Assertion (A).
Both Assertion (A) and Reason (R) are correct, and Reason (R) is the correct explanation of Assertion (А).
Assertion (A) is correct, and Reason (R) is incorrect.
Assertion (A) is not correct, but Reason (R) is correct.
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Solution
Both Assertion (A) and Reason (R) are correct, and Reason (R) is the correct explanation of Assertion (А).
Explanation:
Assertion (A) is correct because debentures due for redemption within the year are no longer counted as long-term debt. Paying them off does not change long-term debt or equity, leaving the Debt-Equity Ratio unchanged. Reason (R) is correct and provides the right explanation because it highlights the accounting rule that reclassifies these upcoming redemptions as Current Liabilities.
