Meaning of Investment Account:

Investment means to spend money outside the business in order to earn some income which are non-trading in
nature. Usually, money is invested in Government Bonds, Securities, Shares and Debentures of companies etc.

Investments are made in two ways:

(a) As Trade Investments:
The investments which are made permanently for a regular income outside the business is known as Trade
Investment. These are treated as fixed assets. That is why if this type of investments are sold at a profit, profit on
such sale of investment is transferred to Capital Reserve Account and not to Profit and Loss Account.

(b) As Marketable Securities:

Sometimes a business wants to invest its idle cash purely on a temporary basis (of course, if the rate of earning is
higher than cost of capital). This type of investment is known as Marketable Securities and is treated as Current
Assets. That is why profit or sale of such investments is transferred to Profit and Loss Account and not to Capital
Reserve.

Again, Marketable Securities are of two types:

A. Fixed Interest Bearing Securities,

B. Variable Interest Bearing Securities.

A. Fixed Interest Bearing Securities: Fixed interest bearing securities mean where the rate of return is fixed, say
10%, 12% or 15%. The returns or income of such securities usually falls due on certain specific dates, as 30th June
or 31st Dec. This is particularly appropriate in case of Govt. Bonds and Securities. For example, if we purchase
1,000, 10% Govt. Bonds @ N100 (interest is payable on 30th September or 31st March), we will have an income of
N10,000; N5,000 falls due on 30th September and N5,000 on 31st March. Each investment is headed with the name
of the security and, at the same time, if the rate of interest or dividend and the date at which it is payable aw fixed
such rates and dates are also to be mentioned.

The Ruling of Investment Account will be:

B. Variable Interest Bearing Securities: Variable Interest bearing securities means where the rate of return is not
fixed, i.e., variable. It is applicable in case of shares. The rate of dividend on shares is not at all fixed,’ rather, it is
fluctuating. In one year the return may be 10% whereas, in the next year, it may be 15%. Usually, shares are
purchased as investment through brokers who charge a small rate of commission on both purchase and on sales.
Note: It must be remembered in this respect that in case of purchase of shares, brokerage or commissions will be
added with the cost price of shares whereas, in case of sale, brokerage and commission will be deducted from sale
price.

The ruling is same as shown above.

Transactions Relating to Investment Account:

Purchase and Sale of Investments:

It has been explained in an earlier paragraph that investments are made in various securities, e.g., Government,
Semi-government, Corporation or Trust Securities, such as Shares, Bonds, Debentures, etc. in long or short-term.
The long-term investment is normally made for earning interest or dividend whereas the short-term investment is
meant for making profit by selling the same when market price becomes favourable. The aforesaid investments are
maintained in the General Ledger (since they are real accounts) when they are few in number. But when they are
substantial, a separate ‘Investment Ledger’ is to be opened for each individual class of securities in addition to
interest or dividend.

The Investment Account is maintained in a columnar form with three amount columns on each side—viz., Nominal,
Interest/Income and Principal/Capital. The face value or nominal value of securities purchased or sold is recorded,
however, in the ‘Nominal’ column. The accrued Interest/Dividend on purchase or sale of securities including the
Interest/Dividend so received is recorded, however, in the ‘Interest/Income’ column. The third column,
‘Capital/Principal’, reveals the true cost or true sales consideration.

Brokerage and Other Expenses:

Generally, investment transactions are made through brokers. They charge a certain small commission against their
services which is known as ‘Brokerage’. But the stamp duty at the prescribed rates is also to be paid in executing
the transaction.
Since the brokerage and stamp duty are capital in nature, these are to be added with the cost price of the
investments, i.e., brokerage will be added at the time of purchasing the securities and the same will be deducted
from the sale price of the investment at the time of sale. As a result, only the net price is to be recorded in the
‘capital’ column of the Investment Account.

Accounting Treatment of Investment Account:

(a) Purchase of Investment: When investment is purchased, its face value is recorded on the debit side of
Investment Account and the actual cost (including brokerage, stamp duty, etc.) is recorded in the principal column.
But if the same is purchased under cum-interest/dividend basis, the accrued interest must be recorded in ‘Interest’
column and will be deducted from the purchase price as the real cost is to be recorded in ‘Principal’ column. But, if
the investment is purchased under ex-interest/dividend basis, the quoted price—together with brokerage and stamp
duty—will be recorded in the ‘Principal’ column. The accrued interest is, however, entered on the Interest/Income
column.

(b) Sale of Investment: When investment is sold, the same is recorded on the credit side of Investment Account,
the face value being recorded in ‘Nominal’ column; the net selling price is entered, however, in the ‘Principal’
column. But if the investment is sold as cum-interest/dividend, the accrued interest will be recorded in
‘Interest/Income’ column and the net selling price (capital portion) on the ‘Principal’ column. On the contrary, if
the same is sold as ex- interest/dividend, the accrued interest/dividend is received by the seller in addition to quoted
sale price. The accrued interest/dividend is entered on the ‘Interest/Income’ column and the quoted sale price in the
‘Capital’ column.

(c) Profit or Loss on Sale of Investment: The difference between the capital cost of securities and the
consideration received towards capital at the time of sale reveals the profit or loss on sale of investment. The profit
or loss may be ascertained either for each individual sale or may be ascertained for all selling transactions at the end
of the year—as a whole. And if the entire investments are sold, the difference between these two ‘Principal’
columns represents profit or loss, as the case may be. But if a part of investments is sold, the balance of investments
on hand should be ascertained first. Therefore, the balance is either valued at cost if the investment is treated as
fixed asset, or the balance is valued at cost or market price, whichever is less if the investment is treated as current
asset.

Naturally, the value of investments at hand is entered on the credit side of the Investment Account in ‘Principal’
column and the difference represents the profit or loss on sale of investment. The profit or loss on such sale is
transferred to Profit and Loss Account if the investment is treated as a current asset or the profit or loss on such sale
is treated separately if the investment is treated as a fixed asset.

(d) Balancing Investment Account: The Balance of Investment account is ascertained at the end of the accounting
period. The balance of ‘Nominal’ column reveals the face value of the investment in hand and— after recording the
closing balance of investment in ‘Principal’ column—the profit or loss is to be ascertained (which has been
explained earlier). And the difference between the two ‘Interest/Income’ columns represents income/interest from
Investment Account which is, ultimately, transferred to Profit and Loss Account.

But, in the true sense of the term, Accounting Treatment depends on the date of purchase and sale of investment.

It may, again, be of two types:

A. Purchase and Sale of Investment just at the date of payment of interest; and

B. Purchase and Sale of Investment before the date of payment of interest.

A. When Purchase and Sale of Investment are made just at the date of payment of interest:
Under the circumstances, there will be no problem as to the cost of investment, because the quoted price does not
include the amount of interest. The quoted price represents the cost of investment.

B. Purchase and Sale of Investment before the date of payment of interest:

Under the circumstances, question arises before us whether the quoted price of investment is inclusive of
interest/dividend or exclusive of interest/dividend. In short, we are to face the problem of Cum-Interest and Ex-
Interest.

Cum-Interest or Cum-Dividend:
Where the rig7ht to receive interest or dividend from the issuer of security passes from the seller to the buyer, the
transaction is known as ‘Cum-Interest’ or ‘Cum-Dividend’ purchase or sale. In other words, when the accrued
interest or dividend from the last interest or dividend date up to the date of transaction is included in the quoted
price, the capital cost of investment purchased or sold is ascertained by deducting the accrued interest/dividend
from the quoted prices. And the difference between the quoted price and the actual cost may be represented as
‘Cum-Interest’ or ‘Cum-Dividend’.

Ex-Interest or Ex-Dividend:
When the seller retains the right to receive the interest/dividend, the transaction is called ‘Ex-Interest’ or ‘Ex-
dividend’ purchase or sale. In other words, when the price quoted is exclusive of accrued interest/dividend, the
price so quoted is treated as the capital cost of investment, i.e., the buyer has to pay accrued interest due from the
last interest date to the date of transaction to the seller along with the cost price of investment.

For Cum-Interest Purchase and Sales: When investments are purchased at Cum-Interest it means quoted price is
inclusive of accrued interest. So, we are to ascertain the amount of interest and the same must be deducted from the
quoted price in order to find out the cost. Investment will be debited with actual cost (to be posted in Principal
column) and accrued interest will be debited with the amount of interest (to be posted in Interest column) and Bank
Account will be credited for the total (i.e., quoted price). Same principle is to be followed also in case of sale of
investment which includes Cum- Interest, i.e., from the quoted selling price, the amount of interest will be deducted
in order to ascertain the cost/principal for this purpose, Bank Account will be debited with total amount or quoted
price and Investment Account will be credited at cost and Interest Account will be credited with the amount of
interest.
Ex-Interest Purchases and Sales: When investments are purchased at Ex-Interest, it means quoted price is
exclusive of accrued interest. In that case, the Investment Account will be debited with quoted prices, Interest
Account will be debited with accrued interest and Bank Account will be credited with total amount (i.e., quoted
price plus interest). But when investment are sold at Ex-interest, quoted price is exclusive of interest. In other
words, Investment Account will be credited with quoted price and Interest Account will be credited with Accrued
Interest and Bank Account will be credited with total i.e., quoted price plus interest. Profit or Loss on sale of
investment should be transferred to Profit and Loss Account. The entries for this purpose we have shown earlier.

Exercise

1. In 2022, 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, 2022, Mr. Bull 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, 2023 the firm sold all of these debentures at 106
cum-interest price, again paying brokerage @ 1 % of cum-interest amount.
Prepare Investment Account in the books of Mr. Bull for the period 1st
December, 2022 to 1st March, 2023.

2.Elizade Ventures is an investment company, incorporated on 31/12/2020. In

year 2022 the follow transactions took place:
On 2/04/2006:
a. Bought N250,000 12% Federal Government stock 2010 @85. Interest payable twice
annually on 31 January and 31 July.
b. Bought N900,000 15% Lagos State Government stock 2015 @80 ex-interest with interest
payable on May 1st and November 1st .
On June 30 2006:
c. Sold N450,000 15% Lagos State Government stock 2015 @ 80 ex-interest
d. Additional purchase of N100,000 12% Federal Government stock 2010 @ 90ex-interest
were made. Also sold N290,000 12% Federal Government Stock 2010 @ 93.5
The interest on other investment were received on due dates. The market values of the
investments on 31 march, 2007 were as follows:
12% Federal government stock 2010 @96.5. 15% Lagos State Government stock 2015 @ 86.
Assuming a FIFO method of investment valuation, you are required to prepare the investment
accounts to record the above transactions