Problems based on Investment in Debentures

Problem 1.
On 1st April, 1983 XY and Co. held 9% debentures in Bombay Ltd., of the face value of ` 10,000 of cost of `
8,000. Market value on that date was ` 9,000. Interest is payable on 31st December every year. On 1st
December, 1983 debentures of nominal value of ` 6,000 were purchased for ` 5,000 ex-interest and on 31st
December, 1983 debentures of nominal value of ` 2,000 were sold cum-interest for ` 1,900. On 1st January,
1984 debentures of nominal value of ` 6,000 were bought at ` 5,800. The market value of the debentures on
31st March, 1984 was ` 90.
Make out Investment Account in the books of XY and Co. showing profit or loss on sale of investment. Stocks
on 31st March each year are valued at lower of cost and market price.

Solution Investment in 9% Deb. of Bombay Ltd. A/c

Date Particulars F.V. Int. Cost Rate Par FV Int Cost

1.4 To Balance b/d 10,000 225 8,000 31.12 By Bank 2000 180 1,720
(10,000 ×9%
×3/12) 31.12 By Bank - 1260 -
1.12 To Bank 6,000 495 5,000 (14,000 ×9% ×1)
1.1 To Bank 6,000 - 5,800

31.3 To P/L A/c 1,170 11 31.03 By Balance c/d 20,000 450 17,091

22,000 1,890 18,811 22,000 1,890 18,811

Working Notes:-

(i) 1.12 Purchase -Ex Interest 5,000

+ Interest accrued
F V× R×T
6000 × 9% × 11/12 495
Pay to seller 5,495
(ii) Sales
31.12 Sale cum Interest Quotation 1,900

(-)Interest accrued

2000 × 9% × 12/12 180

SP of Debenture 1,720

(iii) 1.1 Purchase Cum. Interest 5,800

+ Interest (6000 × 9% × 0/12) Nil
Interest Quotation 5,800
(iv) Since interest received from Investment on 31.12 each year investment books closed by investor on
31.3, therefore Interest accrued for 3 month (J.F.M.)
Topper’s Institute Investment 1.2

Should also be recognized

Interest accrued A/c …………..Dr. 450
To Interest A/c 450

 3
 20,000  9%  
 12 

(b) Current Investment:- Value of cost or Market value (fair value) whichever is lower (AS-13).

 Cost for this purpose to be calculate is only as per Average method (No LIFO/FIFO).
 MP Means ex interest Price
(v) Carring Amt Cost

 18,800 
Cost    20,000  17,091
 22,000 

M .P.  20,000  90%  18,000

Carrying Amt (whichever is lower) only if given in Que. Use Fifo for calculation of cost at end

1.4 10,000 8,000

8,000
Bal. 8,000 6,400 =  8,000
10,000

1.12 6,000 5,000

1.1 6,000 5,800

Total cost 20,000 17,200

Market Price 18,000

Carring Amt. = 17,200

Note:- Any brokerage and Transaction Tax paid at the time of purchase is Added In cost of purchase

At the time of sales. Reduce from selling price.

Problem 2.
Gamma Investment Company hold 1,000, 15% debentures of ` 100 each in Beta Industries Ltd. as on April 1,
2009 at a cost of ` 1,05,000. Interest is payable on June, 30 and December, 31 each year.
On May 1, 2009. 500 debentures are purchased cum-interest at ` 53,500. On November 1, 2009 600 debentures
are sold ex-interest at ` 57,300. On November 30, 2009, 400 debentures are purchased ex-interest at ` 38,400.
On December 31 2009, 400 debentures are sold ex-interest for ` 55,000.
Prepare the investment account showing value of holdings on March 31, 2010 at cost using FIFO method.
[May- 2010, 6 Marks]
Topper’s Institute Investment 1.3

Solution In the books of Gamma Investment Company

Investment account for the period April – March 2010 by using FIFO Method

Date Particulars Face Int. Cost Date Particulars Face Int. Cost
Value Value
1.4.09 To Balance b/d 1,00,00 3,750 1,05,000 30.6.09 By Bank ---- 11,250 ----
0
1.5.09 To Bank a/c 50,000 2,500 51,000 1.11.09 By Bank 60,000 3,000 57,300

30.11.9 To Bank a/c 40,000 2,500 38,400 1.11.09 By P/L A/c - - 5,700

31.12.0 To P/L A/c - - 13,000 31.12.9 By Bank a/c ---- 6750 ----
9
31.3.10 To P & L a/c --- 18,625 7,300 31.12.9 By bank a/c 40,000 3,000 55,000

------- ------- ------- 31.3.10 By Bal. c/d 90,000 3,375 89,400

19,000 27,375 2,01,700 1,90,000 27,375 2,01,700

Working Notes (1) Calculation of interest on 15% Debentures

Date Particulars Face Period of Rate of Interest Interest

value Interest Amount
1.4.09 Interest accrued on 1,00,000 3 months 15% p.a. 3,750
opening balance
1.5.09 Interest on purchase of 50,000 4 months 15% p.a. 2,500
debenture
30.6.09 Interest received on 90,000 6 months 15% p.a. 11,250
holding
1.11.09 Interest on sale of 60,000 4 months 15% p.a. 3,000
debenture
30.11.09 Interest on purchase of 40,000 5 months 15% p.a. 2,500
debenture
31.12.09 Interest received on 40,000 6 months 15% p.a. 3,000
holdings
31.3.10 Interest accrued on closing 90,000 3 months 15% p.a. 3,375
balance
Note: - It is assumed that interest has been received first on 31.12.09 & after that debentures of ` 40,000 FV
have been sold.
Working Notes (2)

Calculating of cost of debenture purchased on 1.5.2009

Total amount paid (Cum Interest quotation) 53,500

Less: Interest (W.N.1) 2,500
Cost = 51,000
Topper’s Institute Investment 1.4

Working Notes (3)

30 June
Interest received
6
1,50,000  15%  = 11,250
12
Working Notes (4)
1 Nov
Ex - Interest SP 57,300
Interest accrued
4
(600 100) 15%  = 3,000
12
Cum-Interest price 60,300

Working Notes (5)

30 Nov
Ex - Interest purchase price 38,400
+ Interest accrued _____
5
(400  100)  15%  = 2,500
12

31 Dec.
Sale Ex - Interest price 55,000
+ Interest accrued _____
6
(400 100) 15%  = 3,000
12
Cum-Interest price 58,000

Working Notes (6)

31 Dec.
Interest received
6
9,000  15%  = 6,750
12

Working Notes (7)

31 Mar.
Interest received
3
9,000  15%  = 3,375
12
Working Notes (8)
Carrying amount at end
(i) M.P. as on 31.3 N.A.
(ii) Cost on FIFO
FV Cost
1.5 50,000 51,000
30.11 40,000 38,400
90,000 89,400
Topper’s Institute Investment 1.5

(iii) Carrying

Problem 3.
In 2011, M/s. Wye Ltd. issued 12% fully paid debentures of ` 100 each, interest being payable half yearly on
30th September and 31st March of every accounting year.
On 1st December, 2012, M/s. Bull & Bear purchased 10,000 of these debentures at ` 101 cum-interest price,
also paying brokerage @ 1% of cum- interest amount of the purchase. On 1st March, 2013 the firm sold all of
these debentures at ` 106 cum-interest price, again paying brokerage @ 1% of cum-interest amount.
Prepare Investment Account the books of M/s. Bull & Bear for the period 1st December, 2012 to 1st March,
2013. [May-2013, 5 Marks]

Solution Investment in 12% Debenture A/c

Date Particular Face Interest Principal Date Particular Face Intere Principal
value value st
1.12.12 To Bank(W.N.1) 10,00,000 20,000 10,00,100 1.3.13 By Bank 10,00,000 50,000 9,99,400
1.3.13 To P/L A/c 30,000 1.3.13 By P/L A/c
(Bal.fig) (Bal.fig) 700
10,00,000 50,000 10,00,100 10,00,000 50,000 10,00,100

Working Note 1.
1.12.12
Cum Interest price 10,000 × 101 10,10,000
Less:- Interest accrued 20,000
2
( 10,00,000 ×12%  )
12
9,90,000
+ Brokerage 10,10,000 × 1% 10,100
Cost of Investment 10,00,100

Working Note 2.
1.3.13
Cum Interest Quotation of sales
10,000 × 106 10,60,000
Less:- Interest accrued
5
(10,00,000 ×12%  ) 50,000
12
10,10,000
Less:- Brokerage 10,60,000 × 1% (10,600)
Net Sales Price 9,99,400

Problem 4.
Madhuri Dixit purchased on 1st March, 2001 ` 24,000 5% Bharat Debenture stock @ 90 cum-interest. Interest
being payable on 31st March and 30th September each year. Stamp and expenses on purchase amounted to ` 20
and brokerage @ 2% was charged on cost; interest for the half – year was received on the due date. On 1st
September ` 10,000 of the stock was sold 92 ex-interest less brokerage @ 2%. On 30th September, ` 8,000
stock was purchased @ 91 ex-interest plus brokerage @ 2% and charges ` 10. On 1st December, ` 6,000 stock
wise sold @ 94 cum interest less Brokerage @ 2%. The market price of stock on 31st December were 88½%.
Show the Investment Account for the year ending on 31st December, 2001 assuming FIFO Method. Calculation
should be made in the multiple of rupee. Madhuri Dixit holds the Bharat Debenture stock as a current assets.
Topper’s Institute Investment 1.6

Solution Investment A/c for the year ending on 31 st Dec. 2001

[Scrip: 5% Bharat Debenture Stock]
[Interest Payable on 31 st March and 30 th September]

Date Particulars Nominal Interest Cost Date Particulars Nominal Interest Cost
Value ` ` ` Value ` ` `
01.03.01 To Bank A/c 24,000 500 21,552 3 1.03.01 By Bank A/c –– 600 ––
30.09.01 To Bank A/c 8,000 200 7,436 [`24,000 
31.12.01 To P & L A/c –– 908 –– 5%  6/12]
01.09.01 By Bank A/c 10,000 208 9,016
30.09.01 By Bank A/c –– 550 ––
[` 22,000 
5%  6/12]
01.12.01 By Bank A/c 6,000 50 5,477
31.12.01 By P & L A/c
(Loss) –– –– 335
31.12.01 By Balance c/d 16,000 200 14,160
32,000 1,608 28,988 32,000 1,608 28,988

Working Notes:

(i) 01.03.01
Cum – Interest purchase price:
24,000  90 100  21,600
Less: Interest 24,000  5%  5 12  5,00
Ex. Interest Cost  21,100
Add: Stamp Duty  20
Add: Brokerage 21,600  2%  4,32
Total cost of debenture  21,552

(ii) 31.03.01
Interest 24,000  5%  6 12  6,00

(iii) 01.09.01
Ex- Interest Sale price (10,000 x 92%) = 9,200
Less: Brokerage (9,200 x 2%) = 1,84
Net ex- interest sale price = 9,016
Interest accrued 10,000 x 5% x 5/12 = 208

(iv) 30.09.01
Ex-Interest purchase price
(8,000 x 91/100) = 7,280
Add: Stamp = 10
Add: Brokerage (7,280 x 2%) = 146
7,436
Interest accrued 8,000 x 5% x 6/12 = 2,00
(v) 30.09.01
Interest 22,000 x 5% x 6/12  5,50
Topper’s Institute Investment 1.7

(vi) 01.12.01
Cum Interest Sale price (6,000 x 94%)  5,640
Less: Interest accrued
(6,000 x 5% x 2/12)  50
Ex- interest price 5,590
Less: Brokerage (5,640 x 2%)  1,13
Net sale price  5,477

Problem 5.
Tee Ltd. purchased on 1st May, 1997 13.5% Convertible Debentures in Dee Ltd. of face value of ` 5,00,000 @
105; Interest on the debentures is payable each year on 31st March and 30th Sept. The accounting year adopted
by Tee Ltd. is the calendar year.

The following other transactions were entered into in 1997 by Tee Ltd. in regard to these
debentures:

August 1 Purchased ` 2,50,000 Debentures @ 107 cum interest.

Oct. 1 Sale of ` 2,00,000 Debentures @ 103.
Dec. 31 Receipt of 10,000 Equity Shares in Dee. Ltd. of `10 each in conversion of 20% of the
Debentures held.
The market value of the Debentures and Equity shares in Dee. Ltd. at the end of 1997 was 106 and
`15 respectively.
Prepare the Debenture Investment Account in the books of Tee Ltd. on Average Cost basis.

Solution Debenture Investment Account in the books of Tee Ltd.

Date Particular F.V Interest Price Date Particulars F.V Interest Price
s
1.5 To Bank 5,00,000 5,625 5,25,000 30.9 By Bank 50,625
1.8 To Bank 2,50,000 11,250 2,56,250 1.10 By Bank 2,00,000 - 2,06,000
31.12 By Equity shares in Dee 1,10,000 3,713 1,50,000
31.12 To P/L 52,313 33,083 Ltd.
1,10,000 13.5%  3 / 12
14,850
By Balance c/d 4,40,000 4,58,333
7,50,000 69,188 8,14,333 7,50,000 69,188 8,14,333
Working Notes:-
(i) 01.05
Ex Interest (assume) 5,00,000 ×105% = 5,25,000
1
Interest = 5,00,000 × 13.5%  = 5,625
12
(ii) 1.8 Cum Interest 2,50,000 × 107% = 2,67,500
4
Less : Interest = 2,50,000 ×13.5%  = 11,250
12
Ex Interest = 2, 56,250
Topper’s Institute Investment 1.8

(iii) 30.09
Interest accrued
7,50,000 × 13.5 × 6/12 = 50,625
(iv) 01.10
Ex- interest 2,00,000 x 103% = 2,06,000

(v) Add: Interest (2,00,000 × 13.5%× 0/12) = 0

(v) 31 Dec.
Investment in Equity Share A/c ……Dr 1, 50,000
To Investment in Debenture 1, 50,000
(vi) Fair value of share = 10,000 × 15 = 1,50,000
(vii) Interest on Debenture converted in shares will be received in cash up to the date of conversion on
the portion (Face value) of Debenture converted.
(7,50,000 – 2,00,000) × 20% = 1,10,000 × 13.5% 3/12 = 3,713
(vi) Interest accrued on December Balance
4,40,000 × 13.5% × 3/12 = 14,850
(vii) Carrying Amt at end
(a) MP = 4,40,000 × 106% = 4,66,400
(b) Cost as per Avg. Cost basis
7,81,250
Total  4,40,000  4,58,333
7,50,000
(whichever is lower)
Carrying Amt. = 4,58,333

Problem. 6
Mr. Chatur had 12% debentures of face value ` 100 of M/S Unnati ltd as current investment.
He provides the following details relating to the investments.
1.04.14 Opening balance 4,000 debentures costing 98 each
1.06.14 Purchased 2,000 debentures @ 120 cum interest
1.09.14 Sold 3,000 debentures @ 110 cum interest
1.12.14 Sold 2,000 debentures @ 105 ex interest
31.1.15 Purchased 3,000 debentures @ 100 ex interest
31.3.15 Market value of the investment @ 105each
Interest due dates are 30th June and 31st December. Mr. Chatur closes his books on 31.3.15. He incurred 2%
brokerage for all his transactions.
Show investment account in the books of Mr. Chatur assuming FIFO method is followed.
[May-2015, 8 Marks]
 Topper’s Institute Investment 1.9

Solution
Investment in 12% debentures of M/s Unnati Ltd A/c (in Chatur’s Books)

Date Particulars ` FV ` Int. ` Cost Date Particulars ` FV ` Int. ` Cost

01.04.14 To bal. b/d 4,00,000 - (4,000x98) 30.06.14 By Bank - 36,000 -
To Bank 3,92,000 Intrecd (WN 1b)
01.06.14 (WN 2) 2,00,000 10,000 2,34,800 01.09.14 By Bank 3,00,000 6,000 3,17,400
To P&L-profit (WN 3)
01.09.14 transfer - - 23,400 01.12.14 By Bank 2,00,000 10,000 2,05,800
To Bank (WN 3)
31.01.15 (100 + 2%) 3,00,000 3,000 3,06,000 01.12.14 By P&L- loss - - 9,600
To P&L Int. transfer
31.03.15 transfer - 45,000 - 31.12.14 By Bank
Intrecd (WN 1c) - 6,000 -
31.03.15 By P&L
(WN 4) - - 3,400
31.03.15 By bal. c/d 4,00,000 - 4,20,000
Total 9,00,000 58,000 9,56,200 Total 9,00,000 58,000 9,56,200

Working Notes: 1. Computation of Interest @ 12% on various dates

Date Particulars FV (`) Period Interest Amount @

(months) 12% p.a. (` )
(a) 01.06.14 Interest on Cum-interest Purchase 2,00,000 5 10,000
(2000X100)
(b) 30.06.14 Interest received on Holding 6,00,000 6 36,000
(4,00,000+2,00,000)
(c) 01.09.14 Interest on Cum-Interest Sale 3,00,000 2 6,000
(3,000x100)
(d) 01.12.14 Interest on Ex- Interest sale 2,00,000 5 10,000
(2,000x100)
(e) 31.12.14 Interest received on Holding 1,00,000 6 6,000
(6,00,000-5,00,000)
(f) 31.01.15 Interest on Ex- Interest Purchase 3,00,000 1 3,000
(3,000x100)

2. Computation of cost of Purchase

Particulars `
Purchase Value (2,000 x 120 + Brokerage @ 2% of 2,40,000) 2,44,800
Less: Interest(WN 1a) (2,000 x 100 x 12% x 5/12) 10,000
Cost of Debenture 2,34,800
Cost per Debenture (2,34,800/2,000) 117.40

3. Computation of Profit or (Loss) on Sale

Particulars Cum Interest Sale 01.09.14 Ex- Interest Sale 01.12.14

Sale proceeds (3,000 × 110) – 2% Brokerage (2,000 × 105) – 2% Brokerage
=3,23,400 = 2,05,800
Less: Interest (for cum int. sale) (WN 1c) = 6,000 N.A
Net Sale Proceeds 3,17,000 2,05,800
Less: Cost of Debentures Out of OB, i.e. (3,000 × 98)= (On FIFO Basis) (1,000 × 98)
2,94,000 +(1,000 × 117.4) = 2,15,400
Profit / (Loss) on sale Profit = 23,400 Loss = (9,600)
 Topper’s Institute Investment 1.10

4. Valuation of Current Investment:

 As on 31.03.15 cost = 4,23,400, computed by balancing the A/c or [(1,000 × 117.40) + (3,000 × 102)].
 However, Market Value = 4,000 × 105 = 4,20,000, which is lower than cost
 Hence, Market Value is considered for Inventory Valuation
 Loss on Valuation (being Current Investment) is transferred to P & L.

Problem. 7
The following information is presented by Mr. Z, relating to his holding in 9% Central Government Bonds.
Opening balance (face value) ` 1,20,000, Cost ` 1,18,000 (Face value of each unit is ` 100).
1.3.2008 Purchased 200 units, ex-interest at ` 98.
1.7.2008 Sold 500 units, ex-interest out of original holding at ` 100.
1.10.2008 Purchased 150 units at ` 98, cum interest.
1.11.2008 Sold 300 units, ex-interest at ` 99 out of original holdings.
Interest dates are 30th September and 31st March. Mr. Z closes his books every 31st December. Show the
investment account as it would appear in his books. Mr. Z follows FIFO method.

Solution In the Books of Mr. Z

9% Central Government Bonds (Investment) Account
Particulars Face Interest Cost Particulars Face Interest Cost
Value Value
2008 ` ` ` 2008 ` ` `
Jan. 1 To bal. b/d 1,20,000 2,700 1,18,000 M arch 31 By Bank A/c - 6,300 -

M arch 1 To Bank A/c 20,000 750 19,600

By Bank A/c
July 1 To P/L A/c - - 833 July 1 By Bank A/c 50,000 1,125 50,000
By Bank A/c
Oct. 1 To Bank A/c 15,000 - 14,700 Sept. 30 By Balance - 4,050 -
c/d
Nov. 1 To P & L A/c - 200 Nov. 1 30,000 225 29,700
-
Dec. 31 To P & L A/c - - Dec. 31 75,000 1,688 73,633
(Transfer) 9,938
1,55,000 13,388 1,53,388 1,55,000 13,388 1,53,388

Working Note:

Calculation of closing balance: Units `

Bonds in hand remained in hand at 31st December
2008
From original holding (1,20,00 – 50,000 – 30,000)= 1,18,000
Purchased on 1st March 40,000  40,000  39,333
Purchased on 1st October 20,000 1,20,000 19,600
15,000 14,700
75,000 73,633

Problem 8.
Bonanza Ltd. On 1st April 1993 ` 2,00,000 of 9% Government loan (2003) at ` 1,90,000. (Face value of loan `
100 each). Three months interest had accrued on the above date. On 31st May, 1993 the company purchased the
same Government loan of the face value of ` 80,000 at ` 95 (net) cum interest. On 1st June 1993 ` 60,000 face
value of the loan was sold at ` 94 (net) ex-interest. Interest on the loan was paid each year 30th June and 31st
December and was credited by the bank on the same date.
On the 30th November 1993, `40,000 face value of the loan was sold at ` 97 (net) cum interest. On 1st
December 1993 the company purchased the same loan ` 10,000 at par ex interest.
Topper’s Institute Investment 1.11

On 1st March 1994 the company sold ` 10,000 face value of the loan at ` 95 ex-interest. The market price of the
loan on 31st March 1994 was ` 96.
Draw up the 9% Government loan (2003) Account in the books of Bonanza Limited. First in first out method
shall be followed and the balance of the loan held by the company shall be valued at total average costs or
market price whichever is lower Calculation shall be made to the nearest rupee or multiple thereof.

Solution In the books of Bonanzaa Ltd.

9% Government Loan (2003) Account
Dr. (Interest payable on 30th June and 31 st December) Cr.
Date Particulars Nominal Interest Principal Date Particulars Nominal Interest Princip
Value ` Amount Value ` Amount al
` `
1993 To Balance b/d 2,00,000 4,500 1,90,000 1993
April
June 1 By Bank A/c 60,000 2,250 56,400
1
June 30 By Bank A/c
M ay. To Bank A/c 80,000 3,000 73,000 (Interest for — 9,900 —
31 6 months)
Dec. 1 To Bank A/c 10,000 375 10,000 Nov. 30 By Bank A/c 40,000 1,500 37,300
1994 1994 By Bank A/c
To Income (Interest for — 8,550 —
M ar. from Invest — 18,525 — M ar. 1 6 months)
31 -ment A/c
By Bank A/c 10,000 150 9,500
M ar. 31 By P. & L. 1,300
A/c —
M ar. 31 (Loss on sale) —
By Balance
1,80,000 4,050 1,68,500
c/d
2,90,000 26,400 2,73,000 2,90,000 26,400 2,73,000

Working Note

(i) 1.4.1993
= 2,00,000 × 9% × 3/12 = ` 4,500
(ii) 31.5.1993
Cost price cum interest quotation=80,000/100 × 95 = ` 76,000
Less: Interest accrued (F.V ×R ×T) = 3,000
(80,000 ×9% ×5/12) 73,000
Net Cost price

(iii) 1.6.1993
Cost price = 60,000 × 94/100
= ` 56,400
Interest accrued = 60,000 ×9% ×5/12 = ` 2,250
(iv) 30.6.1993
Interest = 2,20,000 ×9% ×6/12 = ` 9,900

(v) 30.11.1993
Cum Interest Quotation price = 40,000 × 97% = ` 38,800
Less:- Interest accrued (40,000 × 9% × 5/12) = ` 1,500
Topper’s Institute Investment 1.12

Ex Interest Quotation price = ` 37,300

(vi) 1.12.1993
Interest accrued = 10,000 ×9% ×5/12 = ` 375
31.12.1993
Interest accrued = [(2,00,000 +80,000+10,000)] –(60,000+40,000)]×9%×6/12 =` 8,550
(vii) 1.3.1994
Ex Interest Quotation = 10,000 ×95% = ` 9,500
Interest accrued = 10,000 ×9% ×2/12 = ` 150

(viii) Interest accrued on 31.3.2014= ` 1,80,000 × 9% × 3/12=` 4,050

Normal Value Actual Lost Market Value
Balance of Opening Stock 90,000 85,500 86,400
Balance of May 2013 (Purchases) 80,000 73,000 76,800
Balance out of Dec 2013 (Purchases) 10,000 10,000 9,600

1,80,000 1,68,500 1,72,800

Problem 9.
Mr. Madhukant held 100 6% Stock @ ` 102 on 1-1-2002 on which interest is payable half-yearly on 30th June
and 31st December. The following were his transactions in the same Stock during the year ended on 31-12-
2002:

01-03-2002 Bought 200 Stock ex-interest @ ` 104

31-08-2002 Sold 100 Stock ex-interest @ ` 106
01-10-2002 Bought 300 Stock cum-interest @ ` 105
30-11-2002 Sold 200 Cum-interest @ ` 107

Assuming brokerage @ ¼ % draw up the Investment Account in the books of Mr. Madhukant. Calculate
profit/loss on sale on the basis of average cost. Ignore Income- Tax and Stamps duty.

Solution Investment A/c in the books of Madhukant

Date Particulars FV Interest Price Date Particulars FV Interest Price

1.1 To Balance b/d 10,000 - 10,200 30.6 By Bank - 900 -
1.3 To Bank 20,000 200 20,852 31.8 By Bank 10,000 100 10,573
1.10 To Bank 30,000 450 31,129 30.11 By Bank 20,000 500 20,846
62,181 31.12 By Bank - 900 -
31.12 To P/L A/c - 1,750 329 31.12 By Bal c/d 30,000 Nil 31,091
60,000 2,400 62,510 60,000 2,400 62,510
Topper’s Institute Investment 1.13

Working Notes-

Average Cost = 62,181  30,000  31,091

60,000
Market at end Not given
Carrying Amount 31,091

Problems based on Investment in Equity Shares

Problem 10.
Mr. X purchased 500 equity shares of ` 100 each in the Omega Company Ltd. for ` 62,500 inclusive of
brokerage and stamp duty. Some years later the company resolved to capitalize its profits and to issue to the
holders of equity shares, one equity share for every share held by them. Prior to capitalization, the shares were
quoted at ` 92.50 per share Prepare the Investment Account in ‘X’s books on average cost basis. Apply
Average Method. [Nov. - 2003]

Solution Investment in shares of omega Ltd.

Particular No. Amt. Particular No. Amt.

To Bank @ 125 500 62,500 By Balance c/d 500 62,500
500 62,500 500 62,500
To Balance b/d 500 62,500 By Balance c/d @ 62.5 1,000 62,500
To Bonus Share 500 -
Total 1,000 62,500 Total 1,000 62,500
Carrying Cost
(a) MP = Not applicable
(b) Cost = 62,500
Carry Amt. = 62,500 (whichever is lower)

Problem 11.
Mr. X purchased 500 equity shares of ` 100 each in the Omega Company Ltd. for ` 62,500 inclusive of
brokerage and stamp duty on cum right basis. Later the company announced right issue @ one equity share for
every share held by them. X accepted 50% of right share and sold 50% right shares. The share of Omega Co.
Ltd. were quoted at ` 110 per share per right and the share were quoted at ` 92.50 per shares after right issue.
Mr. X, sold the right @ ` 10 per right share and paid at ` 80 per share as subscription charges for his 50%
shares.
Prepare Investment account on average cost basis valuation.

Solution Right Share Ratio = 1:1

Existing = 500 share = Cost  62,500  125 / share
500
Right to purchase =
500 share
Sale of Right 50% Purchases 50%
250 × 10 = ` 2,500 250 × 80 = ` 20,000
Topper’s Institute Investment 1.14

Purchases
Investment A/c ……………..Dr. 20,000
To Bank 20,000

Sales of Rights
 62,500 
 
Since, old share on which Right is received were purchase at ` 125/share  500  now, after the issue of

Right share Market price reduced to 92.5

Total loss = 500 share × 32.5 (125 – 92.5) = 16,250

Sale of Right = ` 2,500

Investment in share A/c

Particular No. Amt. Particular No. Amt.

To Bank@ 125 500 62,500 By Bank (250 × 10) - 2,500
To Bank @ 80 250 2,0000 By P/L A/c (loss) 10,625
By Balance c/d 750 69,375
750 82,500 750 82,500

Working Note:-

Cost at end = 62,500 + 20,000 – 2,500 = 80,000

Market value at end = 750 × 92.5 = 69,375

Carrying amount (whichever is lower) = 69,375

Problem 12.
Ram held 5000 equity shares of ` 10 each purchased at ` 13 each on July 1, he purchased 1000 shares @ 20
each. On October he receive bonus of 1 : 1. On January 1, he sold 2000 equity shares @ ` 18 each on March 1,
received dividend ` 2000. Market value of shares on March 31 is ` 17 per share. Prepare, Investment account
(April -March).

Solution
Particulars No. Div. Amt. Date Particulars No. Div. Amt.
1.4 To Balance b/d @ 13 5,000 65,000 1.1 By Bank @ 18 2,000 36,000
1.7 To Bank @ 20 1,000 20,000 1.3 By Bank - 2,000 -
To Bonus 6,000 - 31.3 By Balance c/d 10,000 70,833
1.10 To P/L 2,000 21,833

12,000 2,000 1,06,833 12,000 2000 1,06,833

If the sources of Dividend from which it was declared is not given always assume dividend as revenue income.

Working Notes:-
M.P. = 10,000 × 17 = 1,70,000
Topper’s Institute Investment 1.15

65,000  20,000
Cost =  10,000  70,833
12,000

Carrying Amount = 70,833

Problem 13.
Ram purchase 10,000 equity Shares of ` 10 on April 1, 2002 @ ` 15 each on July 1, he again purchased 2,000
shares @ ` 20 each on Oct 1, 2002 company declared and paid dividend for the year 2001 - 2002 @ 10%. On
January 1, he sold 2,000 shares @ ` 15 each. Market value on March 31 is ` 12 per share. Prepare Investment
accounts.

Solution Investment Accounts

Date Particular No. Div. Amt. Date Particular No. Div. Amt.
10.4 To Bank @ 15 10,000 1,50,000 1.10 By Bank 12,000
1.7 To Bank @ 20 2,000 40,000 1.1 By Bank @ 15 2,000 30,000

31.3 To P/L 31.3 By P/L 28,000

By Balance c/d 10,000 1,20,000

12,000 1,90,000 12,000 1,90,000

At Cost
Dividend received = 12,000 x (10 x 10%) = 12,000

If out of profit earned prior If out of profit earned after

to acquisition of shares date of purchase

Recovery of high cost paid Revenue Income

In this question, profit earned is before the date of purchase of shares, therefore dividend will be recovery of
cost.
Bank…………………………………………………………………Dr.
To Investment A/c

Working Notes:-
M.P. 10,000 × 12 = 1,20,000
 1,50,000  40,000  12,000 
Cost   1,48,333
 12,000 
Carrying Amount = 1,20,000 (whichever is lower )
Topper’s Institute Investment 1.16

Problem 14.
Ram acquired 5000 shares @ ` 10 each on 10-1-2001 company declare a right issue @ ` 15 per share, market
value on that date ` 25 per share. Right ratio is 1:1 Ram sold 50% of his right in favour of Shyam for ` 2 each.
Market; price post right was ` 20 per share. Journalize.

Solution
1
Total Right Share to be issued = 5000   5,000 share
1
Sale of right 50% = 2500 share
Purchase of balance = 2500 share
Particulars Dr. Cr.
(i) Purchase of share
Investment in share a/c…………..........Dr. 50,000
To Bank a/c (5000 × 10) 50,000
(ii) Sale of Right
Bank a/c…………….. ………….........Dr. 5,000
To income from sale of Right 5,000
(2500 × 2)
(iii) Purchase of Right Share
Investment in Equity share……Dr. 37,500
To Bank 37,500

Working Note:-

Sale of Right

Original cost = 10

MP before issue = 25

MP after issue = 20

Since MP Right issue is higher than original cost of share therefore, sale of Right revenue income not
treated recover as of cost.

Problem 15.
On 1.1.2001 Sri Devi purchased 500 Equity Share of ` 100 each in Reliance Ltd. @ ` 120 each from a Broker
who charged 2%. She incurred 50 Paise per ` 100 as cost of shares transfer stamps. On 30.11.2001 bonus was
declared in the ratio of 1:2. Before and after the record date of bonus Shares, the shares were quoted at ` 175
per Share and ` 90 per Share. On 31.12.2001 Sri Devi sold bonus Shares to a Broker who charged 2%.
Required : Show the investment Account in the books of Sri Devi who held the Shares as Current Assets.
Topper’s Institute Investment 1.17

Solution Investment A/c in the Books of Sri Devi

For the year ending on 31 st Dec. 2001
[Scrip: Equity Shares of Reliance Ltd.]
Date Particulars Nom inal Price Date Particulars Nom inal Price
Value Value
01.01.01 To Bank A/c 50,000 61,500 31.12.01 By Bank A/c 25,000 22,050

30.11.01 To Bonus Sh. 25,000 –– 31.12.01 By Balance c/d 50,000 41,000

31.12.01 To P & L A/c –– 1,550
75,000 63,050 75,000 63,050

Working Notes:

(i) Cost of Equity Shares purchased on 1st Jan.

= 500  `120 + 2% of ` 60,000 + 0.5 % of ` 60,000 = ` 61,500

(ii) Sale proceeds of Equity Shares sold on 31st Dec.

= 250  ` 90 – 2% of ` 22,500 = ` 22,050

(iii) Profit on sale of Bonus shares on 31st Dec.

= Sale Proceeds – Average cost = ` 22,050 – (` 61,500  25,000 / 75,000)

= ` 1,550

(iv) Valuation of Equity Shares on 31st Dec.

Cost = (` 61,500  50,000/75,000) = ` 41,000

Market value = 500  ` 90 = ` 45,000

Closing Balance has been valued at ` 41,000 lower than the market value.

Problem 16.
On 1.4.2002, Mr. Krishna Murty purchased 1,000 equity shares of ` 100 each in TELCO Ltd. @ ` 120 each
from a Broker, who charged 2% brokerage. He incurred 50 paise per ` 100 as cost of shares transfer stamps. On
31.1.2003 Bonus was declared in the ratio of 1 : 2. Before and after the record date of bonus shares, the shares
were quoted at ` 175 per share and ` 90 per share respectively.

On 31.3.2003 Mr. Krishna Murty sold bonus shares to a Broker, who charged 2% brokerage.

Show the Investment Account in the books of Mr. Krishna Murty, who held the shares as Current assets and
closing value of investments shall be made at Cost or Market value whichever is lower.
[Nov-2003, 10 Marks]
Topper’s Institute Investment 1.18

Solution In the books of Mr. Krishna Investment Account

for the year ended 31 st March, 2003
(Scrip: Equity Shares of TELCO Ltd.)
Date Particulars N.V. Cost Date Particulars N.V. Cost
(` ) (` ) (` ) (` )
1.4.2002 To Bank A/c 1,00,000 1,23,000 31.3..2003 By Bank A/c 50,000 44,100
31.1.2003 To Bonus shares 50,000 31.3.2003 By Bal. b/d 1,00,000 82,000
31.3.2003 To P/L A/c 3,100
1,50,000 1,26,100 1,50,000 1,26,100

Working Notes
(i) Cost of equity shares purchased on 1.4.2002 = 1,000 × ` 120 + 2% of ` 1,20,000 + 1/2% of `1,20,000
= ` 1,23,000
(ii) Sale proceeds of equity shares sold on 31st March, 2003 = 500 × ` 90 - 2% of ` 45,000

= ` 44,100.

(iii) Profit on sale of bonus shares on 31st March, 2003 = Sales proceeds - Average cost
Sales proceeds = ` 44,100

Average cost = ` 1,23,000 × 50,000/1,50,000

= ` 41,000

Profit = ` 44,100 - ` 41,000 = ` 3,100.

(iv) Valuation of equity shares on 31st March, 2003

Cost = (` 1,23,000 × 1,00,000/1,50,000 = ` 82,000)

Market Value = 1,000 shares x ` 90 = ` 90,000

Closing balance has been valued at ` 82,000 being lower than the market value.

Problem 17.
On 1st April, 2008, Mr. Neel purchased 5,000 equity shares of ` 100 each in X Ltd. @ ` 120 each from a
Broker, who charged 2% brokerage. He incurred ½% as cost of shares transfer stamps. On 31st January, 2009,
Bonus was declared in the ratio of 1 : 2 Before and after the record date of bonus shares, the shares were quoted
at ` 175 per share and ` 90 per share respectively. On 31st March, 2009, Mr. Neel sold bonus shares to a broker,
who charged 2% brokerage.
Show the investment Account in the books of Mr. Neel, who held the shares as current assets and closing value
of investments shall be made at cost or Market value, Whichever is lower.
[May-2009, 8 Marks]
Topper’s Institute Investment 1.19

Solution Investment Account in the books of Mr. Neel

For the year ended 31 st March, 2009
Dr. (Scrip: Equity Shares of X Ltd.) Cr.
Date Particulars Nominal Cost (` ) Date Particulars Nominal Cost
value (` ) Value (`) (` )
1.4.08 To Bank (W.N.1) 5,00,000 6,15,000 31.3.09 By Bank A/c 2,50,000 2,20,500
31.01.09 To Bonus Shares 2,50,000 (W.N. 4)
31.03.09 To Profit and Loss 31.3.09 By Balance c/d 5,00,000 4,10,000
A/c (W.N.3) - 15,500 (W.N.4)
7,50,000 6,30,500 7,50,000 6,30,500

Working Notes

1. Calculation of cost of equity shares purchased on 1.4.08

1
= 5,000 × ` 120 – 2% of `6, 00,000 + % of ` 6, 00,000 = ` 6, 15,000
2
2. Calculation of profit proceeds of equity shares sold on 31.3.09
= 2,500 × ` 90 – 2% of ` 2, 25,000 = ` 2, 20,500
3. Calculation of profit on sale of bonus shares on 31.3.09
= Sale proceeds – Average cost

= 2, 20,500 – 2, 05,000 i.e.  Rs. 6,15,000  2,50,000   Rs.15,500

 7,50,000 
4. Valuation of equity shares on 31.3.09

Cost = 6, 15,000  5,00,000  Rs. 4,10,000

7,50,000
Market value = 5,000 shares × ` 90 = ` 4, 50,000
Closing Balance has been valued at ` 4, 10,000 i.e. at cost which is lower than the market value.

Problem 18.
MY Ltd. had acquired 200 equity shares of YZ Ltd. at ` 105 per share on 01.01.2009 and paid ` 200 towards
brokerage, stamp duty and STT. On 31st March, 2009 Shares of YZ Ltd. were traded at ` 110 per share. At what
value investment is to be shown in the Balance Sheet of MY Ltd. as at 31st March, 2009.
[Nov-2009, 2 Marks]

Solution Calculation of cost of investment

Particular (`)
Purchase price of Equity shares of YZ Ltd. (200 shares × `105 per share) 21,000
Add: Brokerage , stamp duty and STT 200
Cost of investment 21,200
If the investment is a long term investment then it will be shown at cost. So that value of investment will be `
21,200. However, if the investment is a current investment, it will be shown at lower of cost (i.e. ` 21,200) or
net realizable value (i.e. ` 200 × 110 = ` 22,000). Therefore value of investment will be ` 21,200.
Topper’s Institute Investment 1.20

Problem 19.
On 1 st April, 2010, Rajat has 50,000 equity shares of P Ltd., at a book value of ` 15 per share (face
value ` 10 each). He provides you the further information:
(1) On 20th June, 2010 he purchased another 10,000 shares of P Ltd. at ` 16 per share.
(2) On 1st August, 2010, P Ltd. issue one equity bonus share for every Six shares held by the shareholders.
(3) On 31st October, 2010 the directors of P Ltd. announced a right issue which entitle the holders to
subscribe three shares for every seven shares at ` 15 per share. Shareholders can transfer their rights in
full or in part.
Rajat sold 1/3rd of entitlement to Umang for a consideration of ` 2 per share and subscribe the rest on 5th
November, 2010.
You are required to prepare Investment A/c in the books of Rajat for the year ending 31st March, 2011.
[May- 2011, 5 Marks]

Solution Investment A/c

Date Particulars No. of Div. Amount Date Particulars No. of Div. Amount
Share (` ) Share (` )
1.4.10 To Bank b/d 50,000 - 7,50,000 5.11.10 By Bank - 20,000 -
20.6.10 To Balance b/d 10,000 - 1,60,000
1.8.10 To Bonus Shares 10,000 - - 31.3.10 By Bal. c/d 90,000 - 12,10,000
To P/L A/c
5.11.10 (b/f) 20,000 - 3,00,000
31.3.10 - 20,000 -
90,000 20,000 12,10,000 90,000 1,000 12,10,000

Valuation of investment

7,50,000  1,60,000  3,00,000

Average cost basis =  90,000  12,10,000
90,000

Problem 20.
Rose Ltd. had made an investment of ` 500 lakhs in the equity share of Nose Ltd. on 10.01.2009. The realisable
value of such investment on 31.03.2009 became ` 200 lakhs as Nose Ltd. lost a case of patent rights. Rose Ltd.
follows financial year as accounting year. How will you recognize this reduction in Financial statements for the
year 2008-09. [Nov-2009, 2 Marks]

Solution
1. If current Investment
Valuation lower of
(i) Cost = 500L
(ii) MP = 200L
Carrying Amount = 200L
Topper’s Institute Investment 1.21

2. Permanent Investment
 Valuation at cost
 If since loss of patents is a long lasting effect
 Therefore reduction in MP of Investment may be assumed as permanent decline in value.
 Therefore value the investment at ` 200 lakhs.

Problem 21.
On 1.4.96 Sundar Lal has had 25,000 equity shares of X Ltd. At a book value of `15 per share (face value `
10). On 20.6.96 the purchased another 5,000 shares of the company at ` 16 per share. The director of X Ltd.
Announced a bonus and right issue. No dividend way payable on these issues.

The terms of the Issue are as follows:

Bonus basis 1 : 6 (date 16/8/96)
Right basis 3 : 7 (date 31.8.96) Price ` 15 per share
Due date of payment 30.9.96

Shareholders can transfer their right in full or in part. Accordingly Sundar sold 33 1/3% of his entitlement to
Sekhar for consideration of ` 2 per share. Due date of payment 30.9.96.

Dividends for the year ended 31.3.96 at the rate of 20% were declared by X Ltd. And received by the Sunder on
31.10.96 Dividends for shares acquired by him on 20.6.96 are to be adjusted against the cost of purchase. On
15.11.96 sunder sold ` 25,000 equity shares at premium of ` 5 per share.

You are required to prepare in the books of Sundar. (1) Investment account (2) P & L Account. For your
exercise, assume that the books are closed on 31/12/96 and shares are valued at average cost.

Solution Investment A/c for the year ending on 31 st Dec. 2001

[Equity Shares in X Ltd.]

Date Particulars No. Divi. Amount Date Particulars No. Divid. Amount
01.04.01 To Bal. b/d 25,000 3,75,000 30.09.01 By Bank (Sale of right 10,000

20.06.01 To Bank 5,000 80,000

16.08.01 To Bonus 5,000 - 31.10.01 By Bank (div id. on 50,000 10,000

30.09.01 To Bank 10,000 1,50,000 on shares acquired

(Rights shares) on 2nd June)

15.11.01 To P & L A/c 60,000 44,444 15.11.01 By Bank

(Sale o f shares) 25,000 3,75,000

31.12.01 By Balance c/d 20,000 2,64,444

45,000 60,000 6,49,444 45,000 60,000 6,49,444

P & L A/c (Relevant Extract)

Particulars `
Dividend Income 60,000
Profit on sale of Investment 44,444
xx
Topper’s Institute Investment 1.22

Working Notes:

Bonus Shares 
25,000  5,000  5,000 Shares
 6 

Rights Shares 
25,000  5,000  5,000  15,000 Shares
 7 

Rights shares renounced = [` 15,000  1/3] = ` 5,000 shares

Dividend received [` 25,000  10  20%] = ` 50,000

Dividend on share purchased on 20th June = ` 5,000  10  20% = ` 10,000 is adjusted to Investment Account.

Cost of Shares on 31st Dec.

 37,5000  80,000  1,50,000  10,000 

  20,000  2,64,444
 45,000 

Problem 22.
On 01-05-2012, Mr. Mishra purchased 800 equity shares of ` 10 each in Fillco Ltd. @ ` 50 each from a
broker who charged 5%. He incurred 20 paisa per ` 100 as cost of shares transfer stamps. On 31-10-2012,
bonus was declared in the ratio 1 : 4. The shares were quoted at ` 110 and ` 60 per share before and after the
record date of bonus shares respectively. On 30-l1-2012. Mr. Mishra sold the bonus shares to a broker who
charged 5%; You are required to prepare Investment Account in the books of Mr. Mishra for the year ending
31-12-2012 and closing value of Investment shall be made at cost or market value whichever is lower.
[Nov-2013, 8 Marks]

Solution Investment A/c in the books of Mr. Mishra for the year ended 31-12-2012

Date Particulars Nominal Price Date Particulars Nominal Price

Value Value
01-05-12 To Bank 800 42,080 30-11-12 By Bank 200 11,400
31-10-12 To Bonus 200 - By Balance c/d 800 33,664
To P/L A/c 2,984
1,000 45,064 1,000 45,064

Working Note 1.
Cost of Equity Share:
Purchase Cost (800 × 50) = 40,000
+ Brokerage @ 5% of 40,000 = 2,000
+ 0.2% of ` 40,000 = 80
42,080
Working Note 2.
Sale proceeds of equity share sold
S.P. = 200 × 60 12,000
Topper’s Institute Investment 1.23

Less: Brokerage @ 5% 600

11,400
Working Note 3.
42,080
Cost of share =  800
1,000
= 33,664
Net Realizable Value = 800 × 60 = 48,000
Here, Investment is to be shown at cost or NRV whichever is lower.
 Value of Investment = 33,664]

Problem 23.
On 1st April 2014, Hasan has 20,000 equity shares of Vayu Ltd., at a book value of ` 20 per share (face value
of ` 10 each). He provides the following information:
(i) On 10th June 2014, he purchased another 5,000 shares in Vayu Ltd., @ ` 15 per share.
(ii) On 1st August 2014, Vayu Ltd., issued one bonus share for every five shares held by the shareholders.
(iii) On 31st August 2014, the directors of Vayu Ltd., announced a rights issue which entitle the shareholders
to subscribe two shares for every six shares held @ of ` 15 per share. The shareholders can transfer
their rights in full in part.
Hasan sold 1/4th his right shares holding to Harsh for a consideration of ` 3 per share and subscribed
the rest on 31st of October.
Prepare Investment A/c in the books of Hasan as on 31st October 2014.
[Nov-2014, 8 Marks]

Solution Investment in Equity Shares of Vayu Ltd.

Date Particulars No. Income Principal Date Particulars No. Income Principal
1.4.14 To balance b/d @ 31.8 By Bank A/c - 7,500
20 20,000 4,00,000
10.6 To Bank A/c @ 15 By Balance c/d 37,500 5,87,500
1.8 To Bonus Shares 5,000 75,000
25000×1/5
31.10 To Bank A/c @ 15 5,000 7,500 -
31.10 To P/L A/c
7,500 1,12,500
37,500 7,500 5,87,500 37,500 7,500 5,87,500

Working Note-
(i) Total right to subscribe = 30000 share × 2/6 = 10000 share
(ii) Sale of right = 10,000×1/4×3 = 7,500
(iii) Purchase of shares = 10000×3/4 = 7,500 shares @ 15
Assuming : No reduction in MP due to right issue.

Problem 24.
On 1st April, 2009, XY ltd. has 15, 000 equity shares of ABC Ltd. at a book value of `15 per share (face value `
10 per share). On 1st June, 2009, XY Ltd. acquired 5,000 equity shares of ABC Ltd. for ` 100,000. ABC Ltd.
announced a bonus and right issue.
(1) Bonus was declared, at the rate of one equity share for every five shares held, on 1 st July 2009.
(2) Right shares are to be issued to the existing shareholders on 1st September 2009. The company will
issue one right share for every 6 shares at 20% premium. No dividend was payable on these shares.
(3) Dividend for the year ended 31.3.2009 were declared by ABC Ltd. @ 20%, which was received by XY
Ltd. on 31st October 2009.
Topper’s Institute Investment 1.24

XY Ltd.
(i) Took up half the right issue.
(ii) Sold the remaining rights for ` 8 per share.
(iii) Sold half of its share holdings on 1st January 2010 at ` 16.50 per share. Brokerage being 1%.
You are required to prepare Investment account of XY Ltd. for the year ended 31 st March 2010 assuming the
shares are being valued at average cost.
[P.M. Page – 12.2]
Problem 25.
A Limited purchased 5,000 Equity Shares (Face Value ` 100 each) of Allianz limited for Rs.105 each on 1st
April 2014. The Shares were quoted cum dividend. On 15th May 2014, Allianz Limited declared & paid
dividend of 2% for year ended 31st March 2014. On 30th June 2014, Allianz Limited issued Bonus Shares in
ratio of 1:5. On 1st October 2014, Allianz Limited issued Rights Share in the ratio of 1:12 at ` 45 per Share. A
Limited subscribed to half of the rights issue and the balance was sold at ` 5 per Right Entitlement. The
Company declared Interim Dividend of 1% on 30th November 2014, Right Shares were not entitled to Dividend.
The Company sold 3,000 Shares on 31st December 2014 at ` 95 per Share. The Company A Ltd incurred 2% as
Brokerage while buying and selling Shares.
You are required to prepare Investments Account in books of A Ltd.
[Nov-2015, 6 Marks]
Solution Points for Consideration
 Sale Proceeds of Rights is to be credited to P & L A/c and not Investment A/c, assuming the Ex-Rights
Price is not lower than the Cost of Acquisition.
 Reduce the Dividend on Shares on 15th May 2014 from the cost of acquisition, to arrive at the Net Cost
of Shares since it is Pre-Acquisition Dividend.

Working Notes

Particulars Computation Result

1. Cost of Purchase (5,000 × ` 105) Add 2% Brokerage ` 5,35,500
2. Dividend Received 5,000 × 100 × 2% ` 10,000
3. Pre-Acquisition No. of Bonus Share 5,000 ÷ 5 1,000 Shares
4. No. of Rights Shares eligible (5,000 + 1,000) × 1/12 500 shares
5. No. of Rights shares subscribed 500 × ½ = 250 shares at ` 45 ` 11,250
6. No. of Rights shares Renounced 500 – 250 = 250 Shares at ` 5 will be taken ` 1,250
to P & L
7. Interim Dividend on 30/11/2014 (5,000 +1,000) × ` 100 ×1%, will be taken ` 6,000
to P & L
8. Cost of Shares sold on 31/12/2014 (5,35,500 + 11,250 – 10,000) ×3,000/6,250 ` 2,57,640
9. Net sale Proceeds for Sale on (3,000 Shares × ` 95) less Brokerage 2% ` 2,79,300
31/12/2014
10. Profit on sale of Shares on 31/12/2014 Net Sale Proceeds ` 2,79,300 Less Cost ` ` 21,660
2,57,640

Investment (Equity Shares in Vaikuntam Ltd) Account

Date Particulars Shares ` Date Particulars Shares `

Nos. Nos.
01/04/14 To Bank (WN 1) 5,000 5,35,500 15/05/14 By Bank (Dvd) (WN
30/06/14 To Bonus (WN 3) 1,000 - 2) 3,000 10,000
01/10/14 To Bank 250 11,250 31/12/14 By Bank (Sale of
(Rights)(WN5) Shares) (WN 7) 3,250 2,79,300
31/12/14 To P & L – Prft (WN 21,660 31/03/15 By Balance c/d 2,79,110
8)
Total 6,250 5,68,410 Total 6,250 5,68,410
Topper’s Institute Investment 1.25

Mixed Problems based on Investment in Equity and

Bonds
Problem 26.
The following transaction of X Investment Ltd. took place during the year ended 31 st March, 2002:
2001.
1 st April Purchased ` 12,00,000 8% bonds @ ` 80.5 cum-interest. Interest is payable on 1st Nov. and 1st
May
12 th April Purchased 1,00,000 Equity Shares of ` 10 each in X Ltd. for ` 40,00,000.
1 st May Received half year’s interest on 8% bonds.
15 th May X Ltd. made a bonus issue of three Equity Shares for every two held. Investor Ltd. sold 1,25,000
bonus Shares @ ` 20 each.
1 st July Purchased 50,000 Equity Share of `10 each in C Ltd. @ ` 7.75 each.
1 st Oct. Sold ` 3,00,000 8% bonds @ ` 81 ex-interest.
1 st Nov. Received half year’s bond interest.
1 st Dec. Received 18% dividend on Equity Share in X Ltd.
2002
1 st Jan. C Ltd. made a rights issue of one Equity Share for every two held @ ` 5 per sh.Right sold in the
market @ ` 2.25 per share.
1 st March Received 12.5% dividend on Equity Share in C Ltd.
Required: Prepare the relevant investment accounts in the books of Investor Ltd. for the year ended
of 31 st March, 2002.

Solution 8% Bond A/c

Date Particular Nominal Income Cost Date Particulars Nominal Income Cost
2001 To Bank A/c 12,00,000 40,000 9,26,000 2001
Apr.1 M ay 1 By Bank A/c __ 48,000 __
2002 Oct 1 By Bank A/c 3,00,000 10,000 2,43,000
M ar.31 To profit on Nov.1 By Bank A/c __ 36,000 __
sale __ 84,000 11,500 2002
M ar.3 By Balance c/d 9,00,000 30,000 6,94,500
1
12,00,000 1,24,000 9,37,500 12,00,000 1,24,000 9,37,500

Equity Share in X Ltd

Date Particular Nominal Income Cost Date Particulars Nominal Income Cost
2001 2001
Apr.12 To Bank A/c 10,00,000 __ 40,00,000 M ar. 15 By Bank A/c 12,50,000 __ 25,00,000
M ay 15 To Bonus Dec. 1 By Bank A/c
2002 issue A/c 15,00,000 __ __ (Dividend) - 2,25,000 -

__ 2002 By Bank c/d 12,50,000 __ 20,00,000

M ar.31 To Interest __ 2,25,000 M ar. 31
To profit on __ __ 5,00,000
sale
25,00,000 2,25,000 45,00,000 25,00,000 2,25,000 45,00,000
Topper’s Institute Investment 1.26

Note: It is assumed the bonus shares are entitled for dividend.

Equity Share in C Ltd.

Date Particular Nominal Income Cost Date Particulars Nominal Income Cost
1.7 To Bank A/c 50,000 3,87,500 1.1 By Bank A/c 56,250 -
@ 7.75 (25,000× 2.5)
To P & L A/c 1,18,750 1.3 By Bank 62,500
(50,000× 10)
× 12.5%
By c/d 50,000 3,87,500
50,000 1,18,750 3,87,500 50,000 1,18,750 3,87,500

Working Notes: Calculation of Profit on Sale

A. Cost per share after Bonus = ` 40,00,00 / 25,000 = `16.
B. Profit = [(` 20 - ` 16 )  (` 1,25,000] = ` 5,00,000.

Problem 27.
Mr. Brown has made following transactions during the financial year 2011-12:

Date Particulars
01.05.2011 Purchased 24,000 12% Bonds of ` 100 each at ` 84 cum-interest. Interest is payable on 30th
September and 31st March every year.
15.06.2011 Purchased 1,50,000 equity shares of ` 10 each in Alpha Limited for ` 25 each through a broker,
who charged brokerage @ 2%.
10.07.2011 Purchased 60,000 equity shares of ` 10 each in Beeta Limited for ` 44 each through a broker,
who charged brokerage 2%.
14.10.2011 Alpha Limited made a bonus issue of two shares for every three shares held.
31.10.2011 Sold 80,000 shares in Alpha Limited for ` 22 each.
01.01.2012 Received 15% interim dividend on equity shares of Alpha Limited.
15.01.2012 Beeta Limited made a right issue of one equity share for every four shares held at ` 5 per share.
Mr. Brown exercised his option for 40% of his entitlements and sold the balance rights in the
market at ` 2.25 per share.
01.03.2012 Sold 15,000 12% Bonds at ` 90 ex-interest.
15.03.2012 Received 18% interim dividend on equity shares of Beeta Limited.
Interest on 12% Bonds was duly received on due dates.

Prepare separate investment account for 12% Bonds, Equity Share of Alpha Limited and Equity Shares of
Beeta Limited in the books of Mr. Brown for the year ended on 31st March, 2012.
[May- 2012, 6 Marks]

Solution 12% Bond

Date Particulars FV Interest Cost Date Particulars FV Interest Cost

1.5.11 T o Bank A/c 24,00,000 24,000 19,92,000 30.9.11 By Bank A/c 1,44,000
1.3.1231. T o P&L A/c 1,05,000 1.3.12 By Bank A/c 15,00,000 75,000 13,50,000
3.12
T o P&L A/c 2,49,000 31.3.12 By Bank A/c 54,000
31.3.12 By Bal. c/d 9,00,000 7,47,000

24,00,000 2,73,000 20,97,000 24,00,000 2,73,000 20,97,000

C.
Topper’s Institute Investment 1.27

Equity shares in Alpha Ltd.

Date Particulars FV Dividend Cost Date Particulars FV Dividend Cost
15.6.2011 T o Bank A/c 1,50,000 38,25,000 31.10.12 By Bank A/c 80,000 17,60,000

14.10.2011 T o Bonus Share 1,00,000 1.01.2012 By Bank A/c 2,55,000

T o P & L A/c 31.3.2012 By Bal. c/d 1,70,000 26,01,000

31.3.2011 T o P & L A/c 5,36,000

(b/f)
31.3.2011 2,55,000

2,50,000 2,55,000 43,61,000 2,50,000 2,55,000 43,61,000

Equity Shares in Beeta Ltd.

Date Particulars FV Dividend Cost Date Particulars FV Dividend Cost
10.7.2011 T o Bank A/c 60,000 26,92,800 15.1.2012 By Bank A/c 20,250

15.1.2012 T o Bank A/c 6,000 30,000 15.3.2012 By Bank A/c 1,18,800

31.3.2012 T o P&L A/c 1,39,050 31.3.2012 By Bal. c/d 66,000 27,22,800

66,000 1,39,050 27,22,800 66,000 1,39,050 27,22,800

Problem 28.
Smart Investments made the following investments in the year 2013-14:
12 % State Government Bonds having face value ` 100
Date Particulars
01.04.2013 Opening Balance (1200 bonds) book value of ` 126,000
02.05.2013 Purchased 2,000 bonds @ ` 100 cum interest
30.09.2013 Sold 1,500 bonds at ` 105 ex interest
Interest on the bonds is received on 30th June and 31st Dec. each year.

Equity shares of X Ltd.

15.04.2013 Purchased 5,000 equity shares @ ` 200 on cum right basis
Brokerage of 1% was paid in addition (Face Value of shares ` 10)
03.06.2013 The company announced a bonus issue of 2 shares for every 5 shares held.
16.08.2013 The company made a rights issue of 1 share for every 7 shares held at ` 250 per share.
The entire money was payable by 31.08.2013.
22.08.2013 Rights to the extent of 20% was sold @ ` 60. The remaining rights were
subscribed.
02.09.2013 Dividend @15% for the year ended 31.03.2013 was received 16.09.2013
15.12.2013 Sold 3,000 shares @ ` 300. Brokerage of 1% was incurred extra.
15.01.2014 Received interim dividend @ 10% for the year 2013-14
31.03.2014 The shares were quoted in the stock exchange @ ` 220
Prepare Investment Accounts in the books of Smart Investments. Assume that the average cost method
is followed.
[May-2014, 8 Marks]
Topper’s Institute Investment 1.28

Solution Investment in 12% Debenture Account

Date Particulars Nominal Amt. Income Date Particulars N.V. Amt. Income
Value
1.4.2013 T o balance b/d 30.6.201 By Bank - - 19,200
1,200 1,26,000 3,600 3 (6 months)
T o bank (3 month) 30.9.201 By Bank 1,500 1,57,500 4,500
02.05.201 2,000 1,91,978 8,022 3 (3 Marks)
3 T o profit on 31.12.20 By Bank - - 10,200
30.9.2013 sale - 8,448 - 13 (6 months)
T o P/L 27,378 31.3.201 By accrued int. - - 5,100
31.3.2014 - - 4 (1,70,000 ×
12%×3/12)
By Balance c/d 1,700 1,68,926 -

3,200 3,26,426 39,000 3,200 3,26,426 39,000

Investment in shares Account

Date Particulars No. Amount Date Particulars No. Amount

15.4.2013 To bank 5,000 10,10,000 30.06.2013 By sale of right
(5,000 ×200) + 1% (1,000 × 20%)@ 60 - 12,000

03.06.2013 To bonus shares 2,000 Nil 02.09.2013 By Pre acquisition

(5,000 × 2/5) dividend - 7,500
(5,000× 10 ×15%)
30.8.2013 To Bank 800 2,00,000 15.12.2013 By Bank
(7,000 × 1/7) - 20% (Sold) 3,000 8,91,000

15.12.2013 To profit on sale - 4,33,115 31.03.2014 By Balance c/d 4,800 7,32,615

Valuation of investment as on 31.03.2014

 Cost of investment as a balancing figure in investment account for 4,800 shares-7,32,615.
 Market value @ 220 per share for 4,800 shares – 10,56,000
Whichever is lower = 7,32,615

Problem 29.
A Ltd. purchased on 1st April, 2015 8% convertible debenture in C Ltd. of face value of 2,00,000 @ 108. On
1st July, 2015 A Ltd. purchased another ` 1,00,000 debenture @ ` 112 cum interest.
On 1st October, 2015 ` 80,000 debenture was sold @ ` 105. On 1st December, 2015, C Ltd. give option for
conversion of 8% convertible debentures into equity share of ` 10 each. A Ltd. receive 5,000 equity share in C
Ltd. in conversion of 25% debenture held on that date. The market price of debenture and equity share in C Ltd.
at the end of year 2015 is ` 110 and ` 15 respectively.
Interest on debenture is payable each year on 31st March, and 30th September.
The accounting year .of A Ltd. is calendar year.
Prepare -investment account in the books of A Ltd. on average cost basis.

Solution
1. Investment in 8% Convertible Debentures of C. Ltd. A/c
Date Particulars Cost Int. Date Particulars Cost Int.
01.04.15 To Bank (WN 1a) 2,16,000 - 30.09.15 By Bank (3,00,000 × - 12,000
8%×1/2)

01.07.15 To Bank (WN lb) 1,10,000 2,000 01.10.15 By Bank (WN 2a) 84,000 -
31.12.15 To P&L A/c - Int tfr - 10,000 01.10.15 By Loss on Sale (WN 1c) 2,933 -
01.12.15 By Equity Shares A/c (WN 3) 59,767 -
31.12.15 By bal. c/d (WN 3) 1,79,300
Topper’s Institute Investment 1.29

Total 3,26,000 12,000 Total 3,26,000 12,000

2. Investments in Equity Share of C Ltd. A/c

Date Particulars FV Cost Date Particulars FV Cost

01.12.15 To Debentures A/c 50,000 59,767. 31.12.15 By balance C/d 50,000 59,767
(5,000 ES × ` 10)
Total 50,000 59,767 Total 50,000 59,767

Working Notes:
1. Cost of Debentures:
108
(a) Purchased on 01.04.2015= ` 2,00,000 × = ` 2 16 000
100
(b) Purchased on 01.07.2015: Total Amount = ` 1,00,000 × 112 = ` 1,12,000 100
3
Interest = ` 1,00,000 × 8% × = ` 2,000 (for 01.04.15 to 30.06.15)
12
So, Cost = 1,12,000 - 2,000 = ` 1,10,000

2. Sale of Debenture on 01.10.2015

105
(a) Sale Proceeds = ` 80,000 × = ` 84,000
100

2,16,000  1,10,000
(b) Average Cost of ` 80,000 Debentures =  80,000 = ` 86,933
3,00,000
Loss on Sale = ` 86,933 - ` 84,000 = ` 2,933

(c) Conversion into Equity & Balance Sheet Valuation

Note: Cost of Debentures held before conversion = ` 3 26 000 - ` 86,933 = ` 2,39,067

Particulars Cost Market Value at Year B/S Value

End
25% Converted into Shares 2,39,067 × 25% = 59,767 5,000 Shares × ` 15 = 75,000 ` 59,767

75% held as Debentures 2,39,067× 75% = ` 1,79,300 ` 2,20,000 Deb×75%× 110/100 ` 1,79,300
=1,81,500

AS-13 based Problems

Problem 30.
Mention two categories' of investments defined by AS 13 and also State their valuation principles.
[Nov-2008, 2 Marks]

Solution
As per AS-13, Investment is the asset held for earning income by way of dividend, interest and
rentals for capital appreciation or for other benefits.
Topper’s Institute Investment 1.30

1. Current Investments Lower of cost or Net Realizable value

Valuation Principle

Note: If realizable value of investment is increased subsequently, then the increase in value of current
investment to the lower of the cost is credited to P & L A/c.

2. Long term Investment Cost less permanent diminution

Valuation Principles in the value of investments.

Problem. 31
Blue-chip Equity Investments Ltd., wants to re-classify its investments in accordance with AS 13.
(i) Long term investments in Company A, costing ` 8.5 lakhs are to be re-classified as current. The
company had reduced the value of these investments to 6.5 lakhs to recognize a permanent decline in
value. The fair value on date of transfer is ` 6.8 lakhs.
(ii) Long term investments in Company B, costing ` 7 lakhs are to be re-classified as current. The fair
value on date of transfer is ` 8 lakhs and book value is ` 7 lakhs.
(iii) Current investment in Company C, costing ` 10 lakhs are to be re-classified as long term as the company
wants to retain them. The market value on date of transfer is ` 12 lakhs.
(iv) Current investment in Company D, costing ` 15 lakhs are to be re-classified as long term. The market
value on date of transfer is ` 14 lakhs.
[P.M, Page No- 1.32. Q. No-49]
Problem 32.
ABC Ltd. wants to re-classify its investments in accordance with AS 13. Decide and state on the amount of
transfer, based on the following information:
(1) A portion of current investments purchased for ` 20 lakhs, to be reclassified as long term
investment, as the company has decided to retain them. The market value as on the date of Balance
Sheet was ` 25 lakhs.
(2) Another portion of current investments purchased for ` 15 lakhs, to be reclassified as long term
investments. The market value of these investments as on the date of balance sheet was ` 6. 5 lakhs.
(3) Certain long term investments no longer considered for holding purposes, to be reclassified as current
investments. The original cost of these was ` 18 lakhs but had been written down to ` 12 lakhs to
recognize permanent decline as per AS 13.
[P.M Page No- 1.31. Q. No-48]
Topper’s Institute Investment 1.31

Problem 33.
M/s Innovative Garments Manufacturing Company Limited invested in the shares of another Company on 1st
October, 2014 at a cost of ` 2,50,000. It also earlier purchased Gold of ` 4,00,000 and Silver of ` 2,00,000 on
1st March, 2012. Market value as on 31st March, 2015 of above Investments are as follows:
`
Shares 2,25,000
Gold 6,00,000
Silver 3,50,000
How above investments will be shown in the books of accounts of M/s Innovative Garments Manufacturing
Company Limited for the year ending 31st March, 2015 as per the provisions of Accounting Standard 13
"Accounting for Investments"?
[P.M, Page No- 1.31. Q. No- 47]

Problem 34.
M/s Active Builders Ltd. invested in the shares of another company on 31 October, 2015 at a cost of ` 4,50,000.
It also earlier purchased Gold of ` 5,00,000 and Silver of ` 2,25,000 on 31st March, 2013. Market values as on
31st March, 2016 of the above investments are as follows:
Shares ` 3,75,000; Gold ` 7,50,000 and Silver ` 4,35,000
How will the above investments be shown in the books of account of M/s Active Builders Ltd. for the year
ending 31st March, 2016 as per the provision of AS-13?
[May – 2016, 5 Marks]
Solution
Type of Investment Valuation Principal Carrying Amount
Equity Shares Lower of Cost ` 4,50,000 or Market Value ` ` 3,75,000
Gold 3,75,000 Cost (Long Term Investment, since the
asset is held for about 3 years) ` 5,00,000
Silver Cost (Long Term Investment, since the asset is
held for about 3 years) ` 2,25,000
Total ` 11,00,000

Problem. 35
The company had subscribed to shares of associate companies amounting to ` 5 crores. These associate
companies have incurred substantial losses and have been referred to BIFR for being declared as sick
companies. The company does not want to make any provision for the fall in the value of the investments.

[CA Final May 2001]

Solution
Valuation of Investment: AS 13 on "Accounting for Investments" requires investments to be classified as long
term and current investments distinctly in its financial statements. The investments in shares of associate
companies can very well be considered as trade investment since they would not be intended to be liquidated
within a period of one year from its acquisition.
Hence they would be classified as long-term investments.
AS-13 states, "Long-term investments should be carried in the financial statements at cost. However, provision
for diminution shall be made to recognize a decline, other than temporary in the value of the investments, such
reduction being determined and made for each investment individually". In the instant case, these associate
companies have incurred substantial losses and have been referred to BIFR for being declared as sick
Topper’s Institute Investment 1.32

companies. The net worth of these companies would have been wiped out resulting in a fall in the value of the
investments. Therefore, such fall cannot be merely temporary as the companies could take a long time to turn
around (if at all) and again have a positive net worth. The auditor in the value of investments as required by AS
13 has been made and to that extent the profits and reserves have been overstated.

Problem. 36
In preparing the financial statements of R Ltd. for the year end 31st March, 1998, you come across the following
information. State with reasons, how you would deal with them in the financial statements:
An unquoted long-term investment is carried in the books at a cost of ` 2 lakhs.1 published accounts of the
unlisted company received in May, 1998 showed that the company was incurring cash losses with declining
market share and the long-term investment may not fetch more than ` 20,000.
[Advanced Accounting, May 1998]
Solution.
Para 32 of AS 13 on" Accounting for Investments", issued by ICAI, states that long-term investments should be
carried in the financial statements at cost. However, if there is a permanent decline in the value of investment
then, a provision for diminution should be made in respect of such investments.
In the present case, the company is incurring cash losses and its market share is declining. These factors
indicate that the decline in value of this Investment is permanent. Thus, a provision for ` 1.8 lakh should be
made to recognize this permanent decline.

Problem. 37
R Ltd. has borrowed ` 25 crores from financial institutions during the financial year 2001-02. These borrowings
are used to invest in shares of A Ltd. a subsidiary company which is implementing a new project estimated to
cost ` 50 crores. As on 31-3-2002, since the said project was not yet complete, the directors of ` Ltd. resolved
to capitalize the interest on the borrowings amounting to ` 3 crores and add it to the cost of investments.
[Adv. Auditing, Nov. 2002]
Solution.
According to AS 13 on “Accounting for investments”, issued by ICAI, cost of investment includes acquisition
charge viz brokerage, fees, duties, etc. In the present case, R Ltd. has used the borrowed funds for Investing In
shares of a subsidiary company.
For acquiring shares of subsidiary company, apart from any fees, duties. etc., there are no cost incurred for
investing in shares. Hence, any borrowing cost incurred cannot be treated as part of cost of investment and
cannot be treated as part of cost of investments. The Accounting Standard 16 on 'Borrowing Costs' also does not
consider investment in share as qualifying assets that can enable company to add the amount of borrowing cost
to investments. In the present case, therefore, statutory auditor would need to qualify his report by stating that
the borrowing costs have been wrongly added to the cost of investments rather than charging them to the profit
and loss account. The effect of the same on the profit for the year would also have to be mentioned in the audit
report.
Topper’s Institute Investment 1.33

Problem. 38
A Company has invested a substantial amount in the shares of another company under the same management.
The market price of the shares of the aforesaid company is about half of that at which these shares were
acquired by the company. The management is not prepared to provide for the fall in the value of shares on the
ground that the loss is only notional till the time the share are actually sold ?

Solution.
As per AS-13, for the purpose of determining carrying amount of shares the investment has to be classified into
long-term and current; in the instant case it appears that the investment is long-term; hence it should be carried
at cost, unless there is permanent diminution in value of investment. At the market price investment is half of its
cost. The reduction appears to be heavy and permanent, hence the provision for permanent diminution
(decrease) in value of investment should be made. The contention of management is not as per AS-13.

Problem. 39
On 1st December 2015, M/s. Blue & Black purchased, 20,000 12% fully paid debentures of ` 100 each at ` 105
cum interest price, also paying brokerage @ 1% of cum interest amount of the purchase. On 1st March, 2016,
the firm sold all these debentures at Rs.110 cum-interest price, again paying brokerage @ 1 % of cum interest
amount. Prepare Investment Account in the books of M/s. Blue & Black for the period 1 st Dec., 2015 to 1st
March 2016. Interest being payable half yearly on 30th September and 31st March of every accounting year.
[Nov.-2016, 4 Marks]
Solution In the books of M/s Blue & Black
Investment Account
Date Particulars Nominal Interest Cost (` ) Date Particulars Nominal Interest Cost (` )
Value ( ` ) Value (` )
1.12.15 To Bank A/c 20,00,000 40,000 20,81,000 1.03.16 By Bank A/c 20,00,000 1,00,000 20,78,000
(W.N.1) (W.N.2)
1.3.16 To P & L A/c 1.3.16 By P&L A/c 3,000
60,000

20,00,000 1,00,000 20,81,000 20,00,000 1,00,000 20,81,000

Working Notes:

(i) Cost of 12% debentures purchase on 1.12.2015 `

Cost value (20,000 × ` 105) = 21,00,000
Add: Brokerage (1% of ` 21,00,000) = 21,000
Less: Interest (20,000 × 100×12% × 2/12) = (40,000)
Total = 20,81,000

(ii) Sale proceeds of 12% debentures sold on 1st March, 2016 `

Sales Price (20,000 × ` 110) = 22,00,000
Less: Brokerage (1% of ` 22,00,000) = (22,000)
Less: Interest (20,000 × 100 × 12% × 5/12) = (1,00,000)
Total = 20,78,000

Problem.40
Akash Ltd. had 4,000 equity share of X Limited, at a book value of ` 15 per share (face value of ` 10 each) on
1st April 2016. On 1st September 2016, Akash Ltd. acquired 1,000 equity shares of X Limited at a premium on
4 per share. X Limited announced a bonus and right issue for existing share holders.
The terms of bonus and right issue were
Topper’s Institute Investment 1.34

(1) Bonus was declared, at the rate of two equity shares for every five equity shares held on 30 th
September, 2016.
(2) Right shares are to be issued to the existing shareholders on 1st December 2016. The company issued
two right shares for every seven" shares held at 25% premium. No dividend was payable on these
shares. The whole sum being payable by 31st December, 2016.
(3) Existing shareholders were entitled to transfer their rights to outsiders, either wholly or in part.
(4) Akash Ltd. exercised its option under the issue for 50% of its entitlements and sold the remaining rights
for ` 8 per share:
(5) Dividend for the year ended 31st March 2016, at the rate of 20% was declared by the company and
received by Akash Ltd. on 20th January 2017.
(6) On 1st February 2017, Akash Ltd. sold half of its share holdings at a premium of ` 4 per share.
(7) The market price of share on 31.03.2017 was ` 13 per share.
You are required to prepare the Investment Account of Akash Ltd. for the year ended 31 st March, 2017 and
determine the value of share held on that date assuming the Investment as current investment.
[May-2017, 8 Marks]
Solution Investment account equity shares in X Ltd.
Date Particulars No. Dividend Amount Date Particulars No. Dividend Amount
` ` ` `
2016 2017
April 1 To Balance b/d 4,000 - 60,000 Jan 20 By Bank A/c - 8,000 2,000
(Dividend
Sept 1 To Bank A/c 1,000 - 14,000 Feb 1 Income)
Sept 30 To Bonus Issue 2,000 - - M ar 31 By Bank A/c 4,000 - 56,000
By Balance c/d 4,000 - 42,250
Dec 31 To Bank A/c 1,000 - 12,500
(Right)
2017
Feb 1 To P & L A/c - - 13,750
Feb 1 To P & L A/c
(Dividend Income) - 8,000 -
8,000 8,000 1,00,250 8,000 8,000 1,00,250
April To Balance b/d 4,000 42,250

Working Notes:
1. Cost of shares sold-Amount paid for 8,000 shares
Marks
(6,000 + 14,000 + 12,500) 86,500
Less: Dividend on shares purchased on June 1st Sep,2016 (2,000)
Cost of 8,000 shares 84,500 (1 Mark)
Cost of 4,000 shares (Average cost basis) 42,500
Sale proceeds (4,000 shares @14) 56,000
Profit on sale 13,750 (1 Mark)
*For ascertainment of cost for equity shares sold, average cost basis has been applied in the above answer.

2. Value of investment at the end of the year

Closing balance will be valued based on lower of cost (42,250) or net realizable value (13 × 4,000).
Thus investment will be valued at 42,250.
Topper’s Institute Investment 1.35

3. Calculation of sale of right entitlement

1,000 shares × 8 per share = 8,000
Amount received from sale of rights will be considered to P/L A/c As per 13
‘Accounting for investments’

4. Dividend received on investment held as 1 St April, 2016

= 4,000 shares × 10 × 20%
= 8,000 will be transferred to Profit and Loss A/c
Dividend Received on shares purchased on 1st September 2016
= 1,000 shares × 10 × 20% = 2,000 will be investment A/c
Note: It is presumed that no dividend is received on bonus shares as bonus shares are declared on 30 th
Sept. 2016 and dividends pertains to the year ended 31.3.2016.