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Standard XII
Business Environment, Ethics and Management
Question

Abdul is a single owner of a shoe manufacturing business. His business was suffering from continuous losses. To revive his business and to expand, he took a loan of 20 lakhs from 'Progressive Finance Co.' In spite of starting new range of products and great effort by Abdul, business continued to suffer losses. This resulted in the declining assets and mounting debts. Abdul started defaulting on his repayment schedule. Finance company served him final notice to repay the loan and settle the account. He proposed the finance company to take over the business assets and clear their dues. Finance company took over the assets of the business in part settlement of their dues as the assets were not sufficient to settle the debts and they claimed the remaining amount from Abdul from his personal assets. Abdul refused to do so on the ground that loan was taken for the business and not by him for personal use.
1. Name the form of business organization followed by Abdul.
2. Is the finance company justified in asking for remaining amount from Abdul's personal assets? justify your answer by giving suitable feature of the business organization.

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Solution
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(i)- Sole proprietorship-The sole proprietorship is the simplest business form under which one can operate a business. The sole proprietorship is not a legal entity. It simply refers to a person who owns the business and is personally responsible for its debts.
(ii) Unlimited liability: Your small business, in the form of a sole proprietorship, is personally liable for all debts and actions of the company.

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Q1
Abdul is a single owner of a shoe manufacturing business. His business was suffering from continuous losses. To revive his business and to expand, he took a loan of 20 lakhs from 'Progressive Finance Co.' In spite of starting new range of products and great effort by Abdul, business continued to suffer losses. This resulted in the declining assets and mounting debts. Abdul started defaulting on his repayment schedule. Finance company served him final notice to repay the loan and settle the account. He proposed the finance company to take over the business assets and clear their dues. Finance company took over the assets of the business in part settlement of their dues as the assets were not sufficient to settle the debts and they claimed the remaining amount from Abdul from his personal assets. Abdul refused to do so on the ground that loan was taken for the business and not by him for personal use.
1. Name the form of business organization followed by Abdul.
2. Is the finance company justified in asking for remaining amount from Abdul's personal assets? justify your answer by giving suitable feature of the business organization.
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Q2
Rajiv is the sole owner of a shirt manufacturing factory. He took loan of Rs.30 lac from Jain finance company for expansion of his business. In beginning business was running well but later on he started facing losses and due to continuous losses he was not able to repay the loan. After receiving many reminders from finance company, Rajiv planned to close the business. He sold all his machines and other assets and collected Rs. 20 lac. He requested the finance Co. to settle the accounts by taking Rs. 20 lac. The finance company refused and plan to file a case against him in court. In court, Mr. Rajiv gave the argument that he has sold all his business assets and loan was taken by him for business and not for personal use. So finance company must settle the account by taking Rs. 20 lac. The court did not agree with the argument of Rajiv and gave the decision in favour of finance company and order Rajiv to pay full loan amount by selling his personal asset.
(a) Name the form of business carried by Rajiv?
(b) State the feature of sole Proprietorship which is kept in mind by court while taking decision.
(c) Is Rajiv's argument of saying he and business are separate entity is correct.
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Q3

Which ratio shows the proportion of equity and debt a company is using to finance its assets and the extent to which shareholder's equity can fulfill obligations to creditors in the event of a business decline?


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Q4
ABC Ltd. took a loan of Rs. 50 lac from a Bank for its growth and expansion plans. The company was unable to repay because of heavy losses. The company asked its shareholders to come forward and contribute towards repayment of loan. The shareholders refused as they had already paid the full amount due on their shares. Bank filed a case against ABC Ltd. The court said that company could not call shareholders to repay loan as they have no unpaid amount of shares. It was the duty of ABC Ltd. to use company's assets to repay loan.
(a) In the above case what kind of liability is enjoyed by the shareholders of ABC Ltd.?
(b) Which feature of company protected shareholders, i.e., owner of business not to pay?
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Q5
(a) A had a capital of ₹ 75,000 on 1st April, 2017. He had also goods amounting to ₹ 15,000 which he had purchased on credit and the payment had not been made. Find out the value of the total assets of the business.

(b ) After a period of one month , he came to know that he had suffered a loss of ₹ 1,700. He withdrew ₹ 800 for his personal use . Find out his capital and assets of the business.
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