Question

State with reason, whether the Proprietary Ratio will improve, decline or will not change because of the following transactions if Proprietary Ratio is 0.8 : 1:

(i) Obtained a loan of ₹ 5,00,000 from State Bank of India payable after five years.
(ii) Purchased machinery of ₹ 2,00,000 by cheque.
(iii) Redeemed 7% Redeemable Preference Shares ₹ 3,00,000.
(iv) Issued equity shares to the vendor of building purchased for ₹ 7,00,000.
(v) Redeemed 10% redeemable debentures of ₹ 6,00,000.

Answer 1

Transaction	Impact
Obtained a loan of Rs 5,00,000 from State Bank of India payable after five years.	Total assets increase by 5,00,000 (as cash is coming in). However, since shareholders' funds remain unchanged, therefore proprietary ratio will decrease.
Purchased machinery of Rs 2,00,000 by cheque.	Total assets are increasing and decreasing by 2,00,000 simultaneously (as cash is going out and machinery is coming in). Thus, both numerator and denominator remain unchanged and so proprietary ratio will not change.
Redeemed 7% Redeemable Preference Shares Rs 3,00,000.	Both shareholders' funds and total assets decrease by 3,00,000 simultaneously and so proprietary ratio will decrease.
Issued equity shares to the vendor of building purchased for Rs 7,00,000.	Both shareholders' funds and total assets increase by 7,00,000 simultaneously and so proprietary ratio will improve.
Redeemed 10% redeemable debentures of Rs 6,00,000	Total assets decrease by 6,00,000 (as cash is going out). However, since shareholders' funds remain unchanged, therefore proprietary ratio will improve.