Question 32 of 47intermediate🔧 ApplyNumerical3 marks

Calculate debt-equity ratio from the following information: Total Assets Rs. 15,00,000 Current Liabilities Rs. 6,00,000 Total Debts Rs. 12,00,000

Correct Answer

Long-term Debts = Total Debts - Current Liabilities = Rs. 12,00,000 - Rs. 6,00,000 = Rs. 6,00,000

Equity (Shareholders' Funds) = Total Assets - Total Debts = Rs. 15,00,000 - Rs. 12,00,000 = Rs. 3,00,000

Debt-Equity Ratio = Debt / Equity = Rs. 6,00,000 / Rs. 3,00,000 = 2 : 1

Exercise: Questions for Practice | Q: 7 | (Page 43)
For More Understanding

Explanation

To solve this, we first determine Long-term Debt. The context defines Debt as Long-term borrowings. Since Total Debts includes all external liabilities, Long-term Debt is derived by subtracting Current Liabilities from Total Debts. Next, we calculate Equity. Using the context's relationship between assets and liabilities, Equity is Total Assets minus Total Debts. Finally, the Debt-Equity Ratio is calculated by dividing the computed Debt by the computed Equity.

Solution Steps

  1. Step 1: Calculate Long-term Debts by subtracting Current Liabilities from Total Debts (Rs. 12,00,000 - Rs. 6,00,000 = Rs. 6,00,000).

  2. Step 2: Calculate Equity by subtracting Total Debts from Total Assets (Rs. 15,00,000 - Rs. 12,00,000 = Rs. 3,00,000).

  3. Step 3: Calculate Debt-Equity Ratio using the formula Debt / Equity (Rs. 6,00,000 / Rs. 3,00,000 = 2 : 1).

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