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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 Issued Equity Shares to the Vendors of Machinery Purchased for Rs 4,00,000. - Accountancy

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.

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Solution

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

 

Concept: Share Capital - Issue and Allotment of Equity Shares
  Is there an error in this question or solution?
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