Assuming that debt-equity ratio is 2:1 State giving reasons whether this ratio will increase or decrease or will have - Accountancy - Accounting Ratios

Question

Assuming that debt-equity ratio is 2:1 State giving reasons
whether this ratio will increase or decrease or will have no
change

Purchase of fixed asset on a credit of 2 mnths
Purchase of fixed asset on long term deferred payment
basis
Sale of fixed asset (book value 4,000) at a loss of 3,000
Issue of new shares for cash

Manisha Arora · Accepted Answer

Dear Student, the solution to your query is here

S No
Transactions
Debt-Equity Ratio
will
Reason

1
Purchase of fixed asset on a credit of 2
months
No Change
It will neither affect the Shareholder’s
Fund nor Long-Term Debt Thus, Debt-Equity Ratio remains
unchanged

2
Purchase of fixed assets on long-term deferred
payment basis
Increase
Due to this, Long-Term Debt of the business
increases but Shareholder’s Fund remains unchanged Thus,
Debt-Equity Ratio increases

3
Sale of fixed assets (book value 4,000) at a
loss of Rs 3,000
Increase
Shareholder’s Fund decreases with the
amount of loss but Long-Term Loan remains unchanged, thus
Debt-Equity Ratio increases

4
Issue of New Share for Cash
Decrease
Due to issue of new shares, Shareholder’s
Fund increase as well as cash of the company increases but
Long-term Debt remains the same Therefore, it results in decrease
of Debt-Equity Ratio

S.No.	Transactions	Debt-Equity Ratio will	Reason
1.	Purchase of fixed asset on a credit of 2 months	No Change	It will neither affect the Shareholder’s Fund nor Long-Term Debt. Thus, Debt-Equity Ratio remains unchanged
2.	Purchase of fixed assets on long-term deferred payment basis	Increase	Due to this, Long-Term Debt of the business increases but Shareholder’s Fund remains unchanged. Thus, Debt-Equity Ratio increases.
3.	Sale of fixed assets (book value 4,000) at a loss of Rs 3,000	Increase	Shareholder’s Fund decreases with the amount of loss but Long-Term Loan remains unchanged, thus Debt-Equity Ratio increases.
4.	Issue of New Share for Cash	Decrease	Due to issue of new shares, Shareholder’s Fund increase as well as cash of the company increases but Long-term Debt remains the same. Therefore, it results in decrease of Debt-Equity Ratio.