Question

State one transaction which results in a decrease in ‘Debt-Equity Ratio’ and no change in ‘Current Ratio’.

Answer 1

The conversion of debentures into shares is a transaction that results in a decrease in the Debt-Equity Ratio and no change in the Current Ratio. When debentures, a type of debt, are converted into shares, the overall debt decreases but shareholders equity increases by the same amount. This reduction in debt and growth in equity results in a reduced debt-equity ratio. Because the conversion includes long-term liabilities and equity, not current assets or liabilities, the Current Ratio is unchanged.