INVESTMENT ACCOUNT

4 INVESTMENT ACCOUNT

 Introduction:

As per Accounting Standard - 13 investments is bifurcated into two parts:

Investment

Classification Current investment Long term investment

`

Initial Recognition Cost Cost

Subsequent Lower of Cost Cost less provision for

Recognition and Fair value ‘other than temporary’
diminution

[1] Current investment:

Current investment is the investment which is held purchase to sale out in
short duration normally one year. This investment should be valued at cost or market
price whichever lower. To calculate cost of investment either the FIFO or average
method is applied.

[2] Long term investment:

Long term investment is the investment which are held to earn the income or
for any specific purpose. This investment is normally held for more than one year. This
investment is always valued at cost except permanent decline price.

 Market quotation of investment:

Market quotation available for security, is either cum interest, cum dividend,
ex right, ex bonus. To find out cost of security and total payment to seller following
treatment is required.

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ACCOUNTING
 Cum-interest quotation (cum = less):
Cum-interest means the quotation which includes interest from the last due
date of interest to the day of transaction. To know the cost of investment interest
should be reduced from quotation price.

Notes:-
Calculation of cost of investment
Particulars Amount `
Total payment (cum-interest) XXX
Less: Interest from last interest payment date to
the date of transaction (XXX)
Add: Other expenses for purchase of investment XXX
Cost XXX
 Ex-interest quotation (Ex = add):
Ex-interest quotation means the quotation which shows cost of security.
To make the payment to seller, interest from the last interest payment date to the day of
transaction is required to be added to know total payment to seller.
Particulars Amount `
Purchase price (Ex-interest) XXX
Add: Interest from last interest payment date to
the date of transaction XXX
Add: Other expenses for purchase of investment XXX
Total payment for investment XXX

Notes:-
If nothing is provided about the quotation consider it as ex-interest quotation………..
 Valuation of investment:
Valuation of investment should be made either as per FIFO method or as per
Average cost method.
 Fluctuating income investment (i.e. shares):
In case of investment in shares income from that is of three types
(i) Bonus
(ii) Dividend
(iii) Right
All three types of income are not fixed in terms of duration and in terms of
amount. To calculate income on this investment, actual declaration by the company is
to be considered while calculating cost of investment.

Notes:-
1) Cum dividend and ex dividend treatment to find out cost and total payment is same
like cum-interest and ex-interest.
2) When company declares the bonus shares, at that time only no. of share is increase
and not the cost.
3) If company declare dividend for the period for which shares are not held by the
investors, that dividend is known as ‘pre dividend’ pre dividend is used to reduce
cost of share by crediting cost column of investment A/c.

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INVESTMENT ACCOUNT

 Cost of Investment

1. The cost of an investment includes acquisition charges such as brokerage, fees and
duties.
2. If an investment is acquired, or partly acquired, by the issue of shares or other
securities, the acquisition cost is the fair value of the securities issued.

The fair value may not necessarily be equal to the nominal or par value of the issued.

If an investment is acquired in exchange, or part exchange, for another asset, the

acquisition cost of the investment is determined by reference to the fair value of the
asset given up or the fair value of the investment acquired, whichever is more clearly
evident.

Types of Acquisition Cost of Investment

Cash/Bank Cash price including charges such as
brokerages, fees and duties
Issue of shares/other securities Fair value of securities issued
In exchange for another asset Fair value of asset given up or fair value of
investment acquired, whichever is more
clearly evident

3. A separate Investment Account should be made for each scrip purchased. The
scrips purchased may be broadly divided into two categories, viz.

Catagories of Investment
on the basis of Income

Fixed income Variable income

bearing scrip bearing scrip

e.g. Government
securities; Debentures e.g. Equity shares
or bonds

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ACCOUNTING

 Disposal of Investment
• On disposal of an investment, the difference between the carrying amount and the
disposal proceeds, net of expenses is recognised in the profit and loss statement.
• When a part of the holding of an individual investment is disposed, the carrying amount
is required to be allocated to that part on the basis of the average carrying amount of
the total holding of the investment.
• In respect of shares, debentures and other securities held as stock-in-trade, the cost of
stocks disposed of may be determined by applying an appropriate cost formula (e.g.,
first-in, first-out (FIFO), average cost, etc.). These cost formulae are the same as those
specified in AS 2, Valuation of Inventories.
(i) Fixed Income Bearing Securities: In case the transaction is on ‘Cum-interest basis’, the
amount of accrued interest from the date of last payment to the date of sale is credited
in the income column and only the sale proceeds, net of accrued interest (from the date
of last payment to the date of sale), is credited in the capital column of investment
account.
In case the transaction is on ‘Ex-interest’ basis, entire sale proceeds is credited in the
capital column and the amount of accrued interest from the date of last payment to the
date of sale, separately received from the buyer will be taken to the credit side of the
income column of investment account.
(ii) Variable Income Bearing Securities: In case of these securities, the entire amount of sale
proceeds should be credited in the capital column of investment account, unless the
amount of accrued dividend can be specifically established. The entries in the books at
the time of sale of investments will be just the reverse of the entries passed for their
acquisition.
Value in ‘capital’ column of Investment
Particulars
Purchase Sale
Purchase price of investment, Entire sale proceeds from

Transaction on ex-interest basis i.e., no impact of interest investments, i.e., no impact of

accrued upto the date of accrued interest (from the date
transaction of last payment to the date of
sale)
Purchase price of investment Sale proceeds, net of accrued
Transaction on cum-interest
less accrued interest upto the interest (from the date of last
basis
date of transaction payment to the date of sale)

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INVESTMENT ACCOUNT

 Reclassification of Investment

When Investments are classified from Current Investments to Long-term Investments,

transfer is made at Cost and Fair Value; whichever is less (at the date of transfer).

When Investments are classified from Long-term Investments to Current Investments,

transfer is made at Cost and Carrying Amount; whichever is less (at the date of transfer).

Reclassification of Investment

Current to Long-term Long-term to Current

Transfer at Lower of Transfer at lower of

cost & fair cost & carrying
value at the date of amount at the date of
transfer transfer

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ACCOUNTING
PRACTICAL PROBLEMS
Q.1 Krishna Investments hold 400, 12% Debentures of `100 each in Acme Ltd. as on 1st April 2010
at a cost of `50,000. Interest is payable on 30th June and 31st December each year.
 On 1st June, 2010, 200 debentures are purchased cum interest at `21,400.
 On 1st November, 2010, 200 debentures are purchased ex-interest at `19,200.
 On 31st December, 2010, 300 debentures are sold cum-interest for `32,250.
Prepare Investment account valuing closing stock as on 31 st March, 2011 at cost
(applying FIFO method) or market price whichever is lower.
 Debentures were quoted at par on 31st March, 2011

Q.2 Mr. Investor furnishes the following details relating to his holding in 6% Government Bonds:
 Opening Balance face values `60,000 – Cost `59,000
1st March, 2010 100 units purchased ex-interest at `98.
1 July, 2010
st Sold 200 ex-interests out of the original holding at `100.
1 October, 2010
st Purchased 50 units at `98 cum-interest.
1st November, 2010 Sold 200 units ex-interest at `99 out of the original holdings.
Interest dates are 30th September and 31st March. Mr. Investor closes his books every 31st December.
Show the Investment account, as it would appear in his books.

Q.3 A purchased on 1st March, `24,000 5% Bharat Debenture Stock at 90 cum-interest, interest
being payable on 31st March and 30th September each year. Stamp and expenses on purchase
amounted to `20 and brokerage at 2% was charged on cost; interest for the half year was
received on the due date.
 On 1st September, `10,000 of the stock were sold at 92-ex-interest less brokerage at 2%.
 On 30th September, `8,000 stock was purchased at 91 ex-interest plus brokerage at 2%
and stamp charges `10.
 On 1st December, `6,000 stocks were sold at 94 cum interest less brokerage 2%.
 The market price of stock on 31st December was 88–½.
Show the Investment A/c. for the year ended 31st December, marking all calculation in months.

Q.4 On 15th March, 2013 OP Ltd. purchased `1,00,000, 9% Government Stock (interest payable on 1st April,
1st July, 1st October and 1st January) at `88.50 cum-interest (face value `100 each).
On 1st August, `20,000 stock is sold at ` 89 cum-interest and on 1st September, `30,000
stock is sold at `89.25 ex-interest.
On 31st December, the date of Balance Sheet, the market price was `90. Show the Ledger
Account of the investment for the year ignoring income tax, brokerage, etc. and making
apportionments in months.

Q.5 MN Ltd. bought and sold 6% Stock as follows, interest being payable on 31 st March, 2012 and
30th September, 2012 each year:
1st March Bought `24,000 @ `90.875 ex-interest
15th June Sold `10,000 @ `92.625 cum-interest.
1 August
st Bought `6,000 @ `91.375 ex-interest.
1 September
st Sold `4,000 @ `93.125 ex-interest.
1st December Bought `12,000 @ `94.125 cum-interest.
Prepare Investment Account for the year ended 31st December, 2012, assuming brokerage
at 1.25% of nominal value of `100 each in each case [Detailed workings are to be given].
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INVESTMENT ACCOUNT
Q.6 Radhe Investments Ltd. hold 1,000 15% debentures of `100 each in Kishan Industries Ltd. as on
1st April, 2012 at a cost of `1,05,000. Interest is payable on 30th June and 31st December each year.
 On 1st May, 2012, 500 debentures are purchased cum-interest at `53,500.
 On 1st November, 2012, 600 debentures are sold ex-interest at `57,300.
 On 30th November, 2012 400 debentures are purchased ex-interest at `38,400.
 On 31st December, 2012, 400 debentures are sold cum-interest for `55,000.
Prepare the Investment Account value holdings on 31st March, 2013 at cost (applying the
FIFO method).

Q.7 Raj purchased 500 ordinary shares of `100 each in the ABC Co. Ltd. for `62,500 inclusive of
brokerage and stamp duty.
Some years later the company resolved to capitalize its profit and to issue to the holders
of ordinary shares, one ordinary share as bonus for every share held by them.
Prior to the capitalization, the shares of ABC Co. Ltd. were quoted at `175 per share.
After the capitalization, the shares were quoted at `92½ per share. Raj sold the bonus shares
and received at `90 per share.
Show the Investment Account in Raj’s book.

Q-8 On 1st April, 2012, Singh had 20,000 equity shares in Dip Ltd. face value of the shares was `10/- each
but their book value was `16 per share. On 1st June, 2012 Singh purchased 5,000 more equity shares in
the company at cost of `14.
On 30th June, 2012, the Directors of Dip Ltd. announced a bonus and rights issue. Bonus was
declared at the rate of one equity share for every five shares held and these shares were received on
2nd August, 2012.
The terms of the rights issue were:
(a) Rights shares to be issued to the existing holders on 10th August, 2012.
(b) Rights issue would entitle the holders to subscribe to additional equity shares in the Company at
the rate of one share per every three shares held at `15 per share the whole sum being payable by
30th September, 2012.
(c) Existing shareholders may, to the extent of their entitlement, either wholly or in part, transfer
their rights to outsiders.
(d) Singh exercised his option under the issue for 50% of his entitlements and the balance of rights;
he sold to Ananth for a consideration of `1.50 per share.
(e) Dividends for the year ended 31st March, 2012, at the rate of 15% were declared by the Company
and received by Singh on 20th October, 2012.
(f) On 1st November, 2012 he sold 20,000 shares at `13 per share. Prepare Equity shares Account for
the year ended 31st March, 2013

Q-9 Teena Ltd. purchased on 1st May, 2012, 13.5% Convertible Debentures in Meena Ltd. Of face value of
`5,00,000 @ 105; Interest on the debentures is payable each year on 31st March and 30th September.
The accounting year adopted by Teena Ltd. is the calendar year. The following other
transactions were entered into in 2012 by Teena Ltd. in regard to these debentures:
1st August Purchased `2,50,000 Debentures @ `107 cum interest.
1 October
st Sale of `2,00,000 Debentures @ `103.
31 December
st Receipt of 10,000 Equity Shares in Meena Ltd. of `10 each in
conversion of 20% of the Debentures held.
The market value of the Debentures and Equity shares in Meena Ltd. at the end of 2012 was
`106 and `15 respectively.
Prepare the Debenture Investment Account in the books of Teena Ltd. on
Average Cost basis.

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ACCOUNTING
Q-10 On 1st 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:
 On 20th June, 2010 he purchased another 10,000 shares of P Ltd. at `16 per share.
 On 1st August, 2010, P Ltd. Issue one equity bonus share for every six shares held by the
shareholders.
 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.

Q-11 Mr. Brown has made following transactions during the financial year 2011-12:
Date Particulars
1st May, 2011 Purchased 24,000 12% Bonds of `100 each at `84 cum-interest. Interest is
payable on 30th September and 31st March every year.
15th June, 2011 Purchased 1,50,000 equity shares of `10 each in Alpha Limited for `25
each through a broker, who charged brokerage @ 2%
10th July, 2011 Purchased 60,000 equity shares of `10 each in Beeta Limited for `44 each
through a broker, who charged brokerage @ 2%
14th October, 2011 Alpha Limited made a bonus issue of two shares for every three shares
held.
31st October, 2011 Sold 80,000 shares in Alpha Limited for `22 each.
1st January, 2012 Received 15% interim dividend on equity shares of Alpha Limited.
15th January, 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.
1st March, 2012 Sold 15,000 12% Bonds at `90 ex-interest.
15th March, 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 Shares of Alpha Limited and Equity Shares
of Beeta Limited in the books of Mr. Brown for the year ended on 31st March, 2012.

Q.12 On 1st April, 2011, Mr. T. Shekharan purchased 5,000 equity shares of `100 each in V. Ltd @ `120 each
from a broker, who charged 2% brokerage. He incurred 50 paisa per `100 as cost of shares transfer
stamps. On 31st January, 2012 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, 2013 Mr. T. Shekharan sold bonus shares to a broker, who charged 2% brokerage.
Show the investment account in the books of T. Shekharan, who held the shares as current
assets and closing value of investments shall be made at cost or market value whichever is
lower.

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