Which of the following transaction will increase Current Ratio but wi…

The correct answer is Option (1) → Issue of Equity shares for cash

Current ratio = Current assets ÷ Current liabilities, and debt-equity ratio = Long-term debt ÷ Shareholders’ funds. The transaction must raise current assets without raising current liabilities, and at the same time raise equity (or cut long-term debt).

• Option (1) Issue of Equity shares for cash — Correct. Cash, a current asset, goes up while current liabilities stay the same, so the current ratio rises. Shareholders’ funds go up while long-term debt stays the same, so the debt-equity ratio falls.

• Option (2) Redemption of 9% preference shares — Incorrect. Cash is paid out, so the current ratio falls; shareholders’ funds also fall, so the debt-equity ratio rises.

• Option (3) Issue of debentures for consideration other than cash — Incorrect. No cash comes in (a fixed asset is usually received), so the current ratio does not change; long-term debt rises, so the debt-equity ratio rises.

• Option (4) Issue of debentures for cash — Incorrect. The cash received raises the current ratio, but debentures are long-term debt, so the debt-equity ratio rises instead of falling.