Practicing Success

Target Exam

CUET

Subject

Accountancy

Chapter

Accounting Ratios

Question:

 Debt equity ratio of a company is 1 : 2. Which of the following transactions will increase it?

Options:

Issue of new shares for cash

Redemption of Debentures

Issue of Debentures for cash

Goods purchased on credit

Correct Answer:

Issue of Debentures for cash

Explanation:

Debt equity ratio of a company is 1 : 2, and if we issue debentures for cash then it will increase the debt equity ratio.
Debt equity ratio = Debt/ Equity, as this ratio is 1:2 so lets assume debt is ₹100000 and equity is ₹200000.
Issue of new shares for cash- Shares issue increase cash and equity. equity increased makes the ratio to decrease.
Redemption of Debentures- Debentures redeem reduce debt.
Issue of Debentures for cash- This transaction affect cash and debentures, Debentures included in debt. So lets assume debentures of 200000 issued means now debt is 300000 and equity is 200000. Debt equity ratio = 300000/200000 = 3:2. Means ratio increased.
Goods purchased on credit- This transaction affect cash and stock. So, no affect on debt equity ratio.