Investment Accounting

Investment Accounting Investments Accounting

Does not deal with: (i) Interest, dividends and rentals earned on investments. (ii) Operating or finance leases. (iii) Investment of retirement benefit plans and life insurance enterprises. (iv) Mutual funds.

ACCOUNTING STANDARD – 13 13

Forms Investments

of

Classification of Investments Cost of Investments

(1) Investments having no physical existence and are represented merely by certificates e.g. shares. (2) In a physical form e.g. buildings. (3) Investment may be in the nature of debt. (4) Investments representing financial rights. Investments are classified as Long Term Investments and Current Investments.

The cost of an investment includes acquisition charges such as brokerage, fees and duties. If an investment is acquired by the issue o f shares or asset, the acquisition cost is the fair value of the securities or asset issued. Interest, dividends and rentals receivables are generally regarded as income, In some circumstances, such inflows represent a recovery of cost and do not form part of income. The pre-acquisition portion is deducted from cost. When rights shares offered are subscribed for, the cost of the rights shares is added to the carrying amount of the original holding. If rights are not subscribed for but are sold in the market, the sale proceeds are taken to the profit and loss statement. Where the investments are acquired on cum-right basis and the market value of investments immediately after their becoming ex-right is lower then it may be appropriate to apply sale proceeds of rights to reduce the carrying amount to market value. Current The carrying amount for current investments is the lower of cost and fair value. Investments Any reduction to fair value and any reversals of such reductions are included in the profit and loss statement. Long-term Long-term investments are usually carried at cost. There is a permanent decline in the value o f Investments a long-term investment, the carrying amount is reduced to recognize the decline. The reduction in the carrying amount is charged to the profit and loss statement. The reduction in carrying amount is reversed when there is a rise in the value of the investment, or if the reasons for the reduction no longer exist. On disposal recognized in the profit and loss statement. When disposing, the carrying amount to be allocated to that part is to be determined on the basis of the average carrying amount of the total holding of the investment.  

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Banana Ltd. On 1 st April 1993 Rs. 2,00,000 of 9% Government loan (2003) at Rs. 1,90,000. (Face value of loan Rs. 100 each). Three months interest had accrued on the above date. On 31 st May, 1993 the company purchased the same Government loan of the face value of Rs. 80,000 at Rs. 95 (net) cum interest. On 1 st June 1993 Rs. 60,000 face value of the loan was sols at Rs. 94 (net) ex-interest. Interest on the loan loan was paid each each year 30 th June and 31st December and was credited by the bank on the same date. On the 30th November 1993. Rs. 40,000 face value of the loan was sold at Rs. 97 (net) cum interest. On 1 st December 1993 the company purchased the same loan Rs. 10,000 at par ex interest. On 1 st March 1994 the company sold Rs. 10,000 face value of the loan at Rs. 95 ex-interest. The market price of the loan on 31 st March 1994 was Rs. 96. Draw up the 9% Government loan (2003) Account in the books of Banana 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. Ans. In the books of Banana Ltd. 9% Government Loan (2003) Account Q.1.

Investment Accounting

CA – CA – IPCC – IPCC – Accounting – Accounting – Gr1 Gr1

(Interest payable on 30th June and 31 st December) Cr.

Dr. Date

Particular

1993 April To Balance 1 b/d May. To Bank A/c 31 To Bank A/c Dec. 1 To Income 1994 from Mar. investment 31 A/c

Nominal Value Rs.

Interest Amount Rs.

Principal

Date

4,500 3,000 375

1,90,000 73,000 10,000

--

18,525

--

1993 June 1 June 30

Nov. 30 Dec. 31 1994 Mar.1 Mar.31 Mar. 31

26,400

Nominal Value Rs.

Interest Value Rs.

Principal Amount Rs.

By Bank A/c By Bank A/c (Interest for 6 months) By Bank A/c By Bank A/c (Interest fro 6 months)

60,000

2,250 9,900

56,400 --

40,000 --

1,500 8,550

37,300 --

By Bank A/c By P&L A/c (Loss on sale) By Balance c/d

10,000 --

150 --

9,500 1,300

1,80,000

4,050

1,68,500

2,90,000

26,400

2,73,000

Rs.

2,00,000 80,000 10,000

2,90,000

Particular

2,73,000

Q.2.

Madhuri Dixit purchased on 1st March, 2001 Rs. 24,000 5% Bharat Debenture stock @ 90 cum-interest. Interest being payable on 31 st March and 30th September each year. Stamp and expenses on purchase amounted to Rs. 20 and brokerage @ 2% was charged on cost; interest for the half- year was received on the due date. On 1 st September Rs. 10,000 of the stock was sold 92 ex-interest less brokerage @ 2%. On 30th September, Rs. 8,000 stock was purchased @ 91 ex-interest plus brokerage @ 2% and charges Rs. 10. On first 1st December. Rs. 6,000 stock wise sold @ 94 cum interest less Brokerage @ 2%. The market price of stock on 31 st December was 88.5%. 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. Ans. st Investment A/c for the year ending on 31 Dec. 2001 [Scrip: 5% Bharat Debenture Stock] st th [Interest Payable on 31 March and 30 September] Date Particulars Nominal Interest Cost Date Particulars Nominal Interest Cost Value Value Value Rs. Rs. Rs. Rs. Rs. Rs. 01.03.01 To Bank 24,000 500 21,552 31.03.01 By Bank A/c -600 -30.09.01 A/c 8,000 200 7,436 [Rs. 24,000 31.12.01 To Bank -908 -* 5% * 6/12] A/c 01.09.01 By Bank A/c 10,000 208 9,016 To P&L 30.09.01 By Bank A/c -550 -A/c [Rs. 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 16,000 200 14,160 c/d 32,000 1608 28988 32,000 1,608 28,988 Working Notes: (i) Cost of Debenture stock purchased on 1 st March


CA – IPCC – Accounting – Gr1

= 90% of Rs. 24,000 + 2% of Rs. 21,600 + Rs. 20 – Rs. 500 ( In terest) = Rs. 21,552 (ii) Sale Proceeds of Debentures stock sold on 1 st Sept. = 92% of Rs. 10,000 + 2% of Rs. 9,200 = Rs. 9,016 (iii) Cost of Debentures Stock purchased on 30 th Sept. = 91% of Rs. 8,000 + 2% of Rs. 7,280 + Rs. 10 (iv) Sale Proceeds of Debentures stock sold = 94% of Rs. 6,000 + 2% of Rs. 5,640 + Rs. 50 (Interest) = Rs. 5,477 (v)

Valuation of Closing Balance of Debentures Stock on FIFO Basis: Nominal Value Actual Value Market Value Rs. Rs. Rs. Balance out of March Purchase 8,000 7,184 7,080 Balance out of Sept. Purchase 8,000 7,486 7,080 16,000 14,620 14,160 Closing Balance has been valued at Rs. 14,160 being lower than the actual cost. (vi) Interest accrued on 31st Dec. = Rs. 16,000 * 5% * 3/12 = Rs. 200. Q.3.

On 1.1.2001 Sri Devi purchased 500 Equity Share of Rs. 100 each in Tata Ltd @ Rs. 120 each from a Broker who charged 2%. She incurred 50 Paise per Rs. 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 Rs. 175 per Share and Rs. 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. Ans.

Date

01.01.01 30.11.01 31.12.01

Particulars

To Bank A/c To Bonus Sh. To P&L A/c

Investment A/c in the Books of Sri Devi st For the year ending on 31 Dec. 2001 [Scrip: Equity Shares of Tata Ltd.] Nominal Price Date Particulars Value Rs. Rs.

50,000 25,000 -75,000

61,500 -1,550 63,050

31.12.01 31.12.01

By Bank A/c By Balance c/d

Nominal Value Rs. 25,000 50,000

Price Rs. 22,050 41,000

75,000

63,050

Working Notes: (i) Cost of Equity Shares purchased on 1 st Jan. = 500 * Rs. 120 + 2% of Rs. 60,000 + ½% of Rs. 60,000 = Rs. 61,500 (ii) Sale proceeds of Equity Shares sold on 31st Dec. = 250 * Rs. 90 – 2% of Rs. 22,500 = Rs. 22,050 (iii) Profit on sale of Bonus shares on 31st Dec. = Sale Proceeds – Average cost = Rs. 22,050 – (Rs. 61,500 * 25,000/75,000) = Rs. 1,550 (iv) Valuation of Equity Shares on 31 st Dec. Cost = (Rs. 61,500 * 50,000/75,000) = Rs. 41,000 Market value = 500 * Rs. 90 + Rs. 45,000 Closing Balance has been valued at Rs. 41,000 lower than the market value. Q.4.

On 1.4.96 Sundar Lal has had 25,000 equity shares of C Ltd. At a book value of Rs. 15 per share (face value Rs. 10). On 20.6.96 the purchased another 5,000 shares of the company at Rs. 16 per share. The director of C 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 Rs. 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 Rs. 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 C Ltd. And received by the Sundar 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 Rs. 5 per share. You are required to prepare in the books of Sundar. (I) 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. Ans. st

Date 01.04.96 20.06.96 16.08.96 30.09.96 15.11.96

Investment A/c for the year ending on 31 Dec. 1996 [Equity Shares in C Ltd.] No. Divi Amount Date Particulars

Particulars To Bal b/d To Bank To Bonus To Bank (Rights Shares) To P&L A/c

25,000 5,000 5,000 10,000 60,000

3,75,000 80,000 -1,50,000

30.09.96

44,444

15.11.96

31.10.96

31.12.96 45,000 Particulars To Balance c/d

60,000

By Bank (Sale of right By Bank (divid. on shares acquired on 2nd june) By Bank (Sale of shares) By Balance c/d

6,55,000

P&L A/c Rs.

1,04,444

No.

25,000 20,000 45,000

Particulars By Profit Transferred By Dividend

1,04,444

Divid 10,000

Amount

50,000

10,000

60,000

3,75,000 2,64,444 6,55,000

Rs 50,000 4,444 1,04,444

Working Notes: (i) Bonus Shares [(25,000 + 5,000)] = 5,000 Shares 6 (ii) Rights Shares [(25,000 + 5,000 + 5,000)] = 15,000 Shares 7 (iii) Rights shares renounced = [15,000 * 1/3] = 5,000 shares (iv) Dividend received [25,000 * 10 * 20%] = Rs. 50,000 Dividend on share purchased on 20th June = 5,000 * 10 * 20% = Rs. 10,000 is adjusted to Investment Account. (v) Cost of Shares on 31st Dec. [(75,000 + 80,000 + 1,50,000 = 10,000) * 20,000] = 2,64,444 45,000 Q.5. The following transactions of Investor Ltd. took place during the year ended 31st March 2008: 2007 1st April Purchased Rs 12,00,000, 8% bonds at Rs 80.50 cum-interest. Interest is payable on 1st November and 1st May. 12th April Purchased 1,00,000 equity shares of Rs 10 each in X Ltd. for Rs 40,00,000. 1st May Received half-year’s interest on 8% bonds. 15th May X Ltd made a bonus issue of three equity shares for every two held. Investor Ltd sold 1,25,000 shares for Rs 20 each. 1st July Purchased 50,000 equity shares of Rs 10 each in C Ltd at Rs 7.75 each. 1st Oct Sold Rs 3,00,000, 8% bonds at Rs 81 ex-interest. 1st Nov Received half-year’s bond interest. 1st Dec Received 18% dividend on equity shares in X Ltd. 2008 1st Jan C Ltd made a rights issue of one equity share for every two held at Rs 5 per share. Rights sold in the market at Rs 2.25 per share. 1st Mar Received 12.5% dividend on equity shares in C Ltd. Prepare the relevant investment account in the books of Investor Ltd for the year ended 31 st March, 2008.



Ans:-

Dr. Date

Particulars

1.4.2007 1.10.2007

To Bank A/c (N 1) To P&L A/c (N 2)

31.3.2008

To P & L A/c

Dr.

Date

Particulars

12.4.2007 15.5.2007 15.5.2007

To Bank A/c To Bonus issue A/c To P&L A/c

31.3.2008

To P&L A/c

In the books of Investor Ltd. 8% Bonds Account st st [Interest Payable : 1 November & 1 May] Nominal Interest Cost Date Particulars value (Rs) (Rs) (Rs) 1,200 40 926 1.5.2007 By Bank A/c --11.5 1.10.2007 By Bank A/c (N 2) 1.11.2007 By Bank A/c (N 3) -84 31.3.2008 By Bal c/d (N 4) 1,200 124 937.5 Investment in Equity Shares of X Ltd. Account Cr. No. Dividend Cost (Rs) Date Particulars (Rs) 1,00,000 -- 40,00,000 15.5.2007 By Bank A/c 1,50,000 --- 1.12.2007 By Bank A/c --5,00,000 31.3.2008 By Balance c/d

Nominal Value (Rs) -300 -900 1,200

No. 1,25,000 -1,25,000

Cr. Interest (Rs) 48 10 36 30 124

Dividend (Rs) -2,25,000 --

-2,50,000

2,25,000 -2,25,000 45,00,000 2,50,000 2,25,000 Dr. Investment in Equity Shares of C Ltd. Account Cr. Date Particulars No. Dividend Cost Date Particulars No. Dividend (Rs) (Rs) (Rs) 1.7.2007 To Bank A/c 50,000 -3,87,500 1.3.2008 By Bank A/c -62,500 31.3.2008 To P&L A/c -62,500 -- 31.3.2008 By Bal c/d 50,000 -50,000 62,500 3,87,500 50,000 62,500 Tutorial Note: Amount received Rs 56,250 (50,000/2×1×Rs 2.25) by selling rights entitlement will be credited to Profit and Loss Account [AS — 13, Para — 13] Working Notes: (1) On 1st April, 2007, 12,000, 8 % bonds were purchased @ Rs 80.50 cum-interest. Total amount paid 12,000 × Rs 80.50 = Rs 9,66,000 which includes accrued interest for 5 months, i.e., 1 st November, 2006 to 1st April, 2007. Accrued interest will be: (2) On 1st October, 2007, 3,000 bonds were sold @ Rs 81 ex-interest. Total amount received = 3,000 × 81 + accrued interest for 5 months = Rs 2,43,000 + (3,00,000 × 8/100 × 5/12 = Rs 10,000). Profit on Sale of Bonds on 1.10.2007 Rs Sale Proceeds 2,43,000 Less: Average Cost: Rs 9,26,000 × Rs 3,00,000 2,31,500 Rs 12,00,000 . 11,500 Profit on Sale (3) On 1 st November, 2007, interest will be received for 9,000 bonds @ 8% for 6 months, i.e., Rs 9,00,000 × 8/100 × ½ = Rs 36,000. (4) Cost of bonds on 31.3.2008 will be: Rs 9,26,000/12,000 ×9,000 = Rs 6,94,500. (5) Profit on Sale of Shares: Cost per share after bonus = Rs 40,00,000 / 2,50,000 = Rs 16. Profit per share sold (Rs 20- Rs16) = Rs 4. Therefore, total profit on sale of 1,25,000 shares = Rs 4 × 1,25,000 = Rs 5,00,000. Q.6. On 1st April, 2008. Mr. Aman purchased 5,000 equity shares of Rs. 100 each in X Ltd. @ Rs. 120 each from a Broker, who charged 2% brokerage. He incurred ½% as cost of shares transfer stamps. On 31 st 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 Rs. 175 per share and Rs. 90 per share respectively. On 31 st March, 2009, Mr. Aman sold bon us shares to a broker, who charged 2% brokerage. Show the Investment Account in the books of Mr. Aman, who held the shares as current assets and closing value of investments shall be made at cost or Market value, whichever is lower. Answer: Investment Account in the books of Mr. Aman



Cost (Rs) -243 -694.5 937.5

Cost (Rs) 25,00,000 -20,00,000

45,00,000

Cost (Rs) -3,87,500 3,87,500

st

For the year ended 31 March, 2009 (Scrip: Equity Shares of X Ltd.) Date

Particulars

1.4.08 31.01.09 31.03.09

To Bank A/c (W.N.1) To Bonus Shares To Profit and Loss A/c (W.N.3)

Nominal Value (Rs.) 5,00,000 2,50,000

Cost (Rs.)

--

15,500

6,15,000

Date

Particulars

31.3.09

By Bank (W.N.2)

31.3.09

A/c

Nominal Value (Rs.) 2,50,000

Cost (Rs.)

5,00,000

2,20,500 4,10,000

By Balance c/d

7,50,000 6,30,500 Working Notes: 1. Calculation of cost of equity shares purchased on 1.4.08

7,50,000

6,30,500

1

= 5,000 × Rs. 120 – 2% of Rs. 6,00,000 + % of Rs. 6,00,000 = Rs. 6,15,000 2

2. 3.

Calculation of profit proceeds of equity shares sold on 31.3.09 = 2,500 × Rs. 90 – 2% of Rs. 2,25,000 = Rs. 2,20,500 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 × 4.

2,50,000 7,50,000

) = Rs. 15,500

Valuation of equity shares on 31.3.09

Cost = 6,15,000 ×

5,00,000 7,50,000

= Rs. 4,10,000

Market value = 5,000 shares × Rs. 90 = Rs. 4,50,000 Closing Balance has been valued at Rs. 4,10,000 i.e. at cost which is lower than the market value. Q.7. (iii) MY Ltd. had acquired 200 equity shares of YZ Ltd. at Rs. 105 per share on 01.01.2009 and paid Rs. 200 towards brokerage, stamp duty and STT. On 31st March, 2009 Shares of YZ Ltd. were traded at Rs. 110 per share. At what value investment is to be shown in the Balance Sheet of MY Ltd. as at 31 st March, 2009. Answer: Calculation of Cost of Investment Rs. Particulars Purchase price of Equity shares of YZ Ltd. (2 00 shares × Rs. 105 per share) 21,000 Add: Brokerage, Stamp duty and STT 200 Cost of investment 21,200 If the investment is a long then investment then it will be shown at cost. Therefore value of investment will be Rs. 21,200. However, if the investment is a current investment, then it will be shown at lower of cost (i.e. Rs. 21,200) or net realizable value (i.e. Rs. 200 × 110 = Rs. 22,000). Therefore value of investment will be Rs. 21,200 Q.8.

Mr. Investor furnishes the following details relating to his holding in 6 percent Government Bonds: Opening Balance as on 1.1.95 face value Rs. 60,000. Cost Rs. 59,000. 1.03.95 100 units purchased ex-interest at Rs. 98. 1.07.95 Sold 200 ex-interest out of the original holding at Rs. 100. 1.10.95 Purchased 50 units at Rs. 98 cum-interest 1.11.95 Sold 200 units ex-interest at Rs. 99 out of the original holding Interest dates are 30 th September and 31 st March. Mr Investor closes his books every 31 st December. Show the Investment account as it would appear in h is books. Ans Dr.

Date

Particulars

Nominal Rs.

1995


Investment in 6% Government Bonds Account Cr. Interest Principal Date Particulars Nominal Rs. Rs. Rs

Interest Rs

1995


Principal Rs

Jan. 1 Mar.1 July 1. Oct. 1 Dec. 31 Dec 31

To Balance b/d To Bank To P&L A/c (Profit on sale) To Bank To P&L A/c

60,000 10,000

900 250

59,000 9,800

Mar 31 July 1 333 Sep 30 4,900 Nov 1 134 Dec 31

-5,000 --

----

--

3,375

--

75,000

4,525

74,167

By Bank By Bank By Bank By Bank By Balance c/d

-20,000 -20,000 35,000

2,100 300 1,500 100 525

-20,000 -19,800 34,367

75,000

4,525

74,167

To Income from Investment A/c

Q.9.

Delhi Investments held 400. 12 percent debentures of Rs. 100 each in Acme Ltd. as on 1 st April, 1995 at a cost of Rs. 50,000. Interest is payable on 30 th June and 31st December, each year. On 1 st June 1995, 200 debentures are purchased cuminterest for Rs. 21,400. On 1st November. 1995, 300 debentures are sol ex-interest at Rs. 28,650. On 30th November, 1995, 200 debentures are purchased ex-interest at Rs. 19,200. On 31 st December, 1995. 300 debentures are sold cum-interest or Rs. 32,250. Prepare investment account valuing closing stocks as on 31 st March, 1996 at cost (applying FIFO method) or market price, whichever is lower. The debentures were quoted at par on 31st March, 1996. Ans. Delhi Investments 12% Debentures in ACME Ltd. Account (Interest payable 30 th June & 31st Dec.)

Date 1995 April 1 June 1 Nov 30 Dec 31

Particular

To Balance b/d To Bank To Bank To P&L A/c (Profit transferred)

Nominal Rs

Interest Rs

40,000 20,000 20,000

1,200 1,000 1,000

--

5,200

Principal Rs

Date

1995 50,000 June 20,400 30 19,200 Nov 1 --

Dec 31

Particular

Nominal Rs

Interest Rs

Principal Rs

By Bank By Bank By P&L A/c By Bank By P&L A/c Loss on sale) By Bank (Interest on Rs. 20,000)

-30,000 -30,000

3,600 1,200 -1,800

-28,650 8,850 30,450

--

--

\2,450

--

1,200

--

By Balance c/d

20,000

600

19,200

80,000

8,400

89,600

1996 Mar 31 80,000

8,400

89,600

Investors Ltd. held on 1-1-1992. Rs. 60,00 of 12% Government securities (Tax free) of Rs. 100 each of Rs. 56,500. On Q.10. 1.6.1992, the company purchased a further of Rs. 40,000 of the security at 96.5 cum -interest brokerage being 2.5%. On 31.7.1992 Rs. 50,000 of the security was sold at 94.5 ex-interest, brokerage being 2%. On 1.12.1992 Rs. 20,000 of the security was again sold at Rs. 96 cum-interest. Interest on the security was paid each year on 31st March and 30th September and was credited by the bank on 3 rd April th and 4 October respectively. The Price of the security on 31.12.1992, was Rs. 96. Investors Ltd. closes its books on 31 st December each year. Draw up the Investment Account in the books of Investors Ltd.



Ans.

Date

Particular

1992 Jan 1 June 1 Dec 31

To Balance b/d To Bank To P&L A/c (Int. transferred)

Nominal Rs

In the books of Investors Ltd. Investment Account (12% Govt. Security: tax free) Interest Principal Date Particulars Rs Rs

60,000 40,000

1,800 800

56,500 38,765

-

7,300

--

1992 Apr 3

July 31 Oct 4

Dec 1 Dec 31 Dec 31 1,00,000 1.

9,900

By Bank (Int on Rs. 60,000 for 6 months @ 12% p.a.) By Bank By Bank (Int on Rs. 50,000 for 6 months @ 12% p.a) By Bank (Sales at 96 cum-int) By P&L A/c (Loss on sale) By Balance c/d (at cost)

95,265

Nominal Rs.

Interest Rs.

Principal Rs.

-50,000

3,600 2,000

-46,305

--

3,000

--

20,000

400

18,800

--

--

1,360

30,000

900

28,800

1,00,000

9,900

95,265

[(40,000 * 96.5%) – 40,000 * 12% * 2/12] + 2.5%

Q.11. On 1.1.1995, X Ltd, had 10,000 Equity Shares of Rs. 10 each in Daman Ltd. Purchased for Rs. 1,25,000. The company unlike Investment Companies does not make any apportionment of dividends [received or receivable} in between capital and revenue. On 15.5.1995, the Daman Ltd, made a bonus issue of 1 fully paid share for 2 held on 15.5.1995. In addition on the same day Right shares were issued at 3 for 5 held that date at a premium of Rs. 3, Rs. 7 to be paid on application and the ba lance in one call after a month. These shares are not to rank for dividend for the year ending 30 th June, 1995.2,000 Right Shares were taken up by X Ltd. b alance Right being sold at Rs. 2 each on 25.5.1995. On 15.10.1995, the company declared a dividend of 20% for the year ending 30 th June, 1995. Make out the Investment Account in the books of X Ltd. Ignore Income-Tax. Ans.

Date 1995 Jan 1 May 15

June 15

Dec 31

Particular

To Balance b/d To Bonus Shares To Bank (shares Application money @ Rs. 7 on 2,000 shares) To Bank (Share Call Money @ Rs. 6 on 2,000 shares) To P&L A/c (Dividend tr) (bal.fig)

Nominal Rs. 1,00,000 50,000 20,000


In the Books of X Ltd. Investment Account Interest Principal Date Rs Rs

-

1,25,000 14,000

1995 May 25

Oct 15

-

-

12,000 Dec 31

-

-

-

-

28,000

-

Particular

By Bank (4,000 Right shares sold @ Rs.2) By Bank (Dividend received @ 20% on Rs. 1,00,000) By Balance c/d

Nominal Rs.

Interest Rs.

Principal Rs.

-

8,000

-

-

20,000

-

1,70,000

-

1,51,100


1,70,000

28,000

1,51,000

1,70,000

28,000

1,51,100

Q.12. M.N. Ltd. bought and sold 6% Stock as follows, interest being payable on 31 st March and 30th September each year: 2007 March 1 Bought Rs 24,000 @ Rs 90.875 ex-interest, brokerage Rs 30 June 15 Sold Rs 10,000 @ Rs 92.625 cum-interest, brokerage Rs 13 Aug 1 Bought Rs 6,000 @ Rs 91.375 ex-interest, brokerage Rs 8 Sept 1 Sold Rs 4,000 @ Rs 93.125 ex-interest, brokerage Rs 5 Dec 1 Bought Rs 12,000 @ Rs 94.125 cum-interest, brokerage Rs 15 Prepare Investment Account for the year ended 31 st December 200 Ans:In the books of MN Ltd. 6% Stock Account st th [Interest Payable: 31 March & 30 September] Cr. Nominal Interest Cost Date Particulars value (Rs) (Rs) 24,000 600 21,840 31.3.07 By Bank A/c (Note 2) --25 15.6.07 By Bank A/c (Note 3) 1.9.07 By Bank A/c (Note 5) 6,000 120 5,490 30.9.07 By Bank A/c (Note 6) --74 31.12.07 By Bal c/d (Note 8)

Dr.

Date

Particulars

1.3.07 15.6.07

To Bank A/c (Note 1) To Profit & Loss A/c (Note 2) To Bank A/c (Note 4) To Profit & Loss A/c (Note 5) To Bank A/c (Note 7) To Profit & Loss A/c

1.8.07 1.9.07 1.12.07 31.12.07

12,000 -42,000

120 1,005 1,845

11,190 -38,619

Nominal value -10,000 4,000 -28,000

Interest (Rs) 720 125 100 480 420

Cost (Rs) -9,125 3,720 -25,774

42,000

1,845

38,619

Q.13. Kanpur Investments Ltd. hold 1,000 15% debentures of Rs 100 each in Udaipur Industries Ltd. as on April 1, 2007 at a cost of Rs 1,05,000. Interest is payable on June 30 and December 31 each year. On May 1, 2007, 500 debentures are purchased cum-interest at Rs 53,500. On November 1, 2007, 600 debentures are sold ex-interest at Rs 57,300. On November 30, 2007, 400 debentures are purchased ex-interest at Rs 38,400. On December 31, 2007, 400 d ebentures are sold cum-interest for Rs 55,000. Prepare the Investment Account upto March 31, 2008. Ans:-

Dr.

Date

Particulars

1.4.07 1.5.07 30.11.07 31.12.07

To Bal b/d (N 1) To Bank A/c (N 2) To Bank A/c (N 5) To Profit & Loss A/c (Note 6) To Profit & Loss A/c

31.3.08

In the books of K anpur Investments Ltd. 15% Debentures in Udaipur Industries Ltd. Account th st [Interest Payable : 30 June & 31 December] Cr. Nominal Interest Cost Date Particulars Value (Rs) (Rs) 1,00,000 3,750 1,05,000 30.6.07 By Bank A/c (N 3) 50,000 2,500 51,000 1.11.07 By Bank A/c (N 4) 40,000 2,500 38,400 1.11.07 By Profit & Loss --11,385 A/c (Note 4) 31.12.07 By Bank A/c (N 6) -18,625 -- 31.12.07 By Bank A/c (N 7) 31.3.08 By Bal c/d (N 8) 1,90,000 27,375 2,05,785

Nominal Value -60,000 --

Interest (Rs) 11,250 3,000 --

Cost (Rs) -57,300 5,100

40,000 -90,000 1,90,000

3,000 6,750 3,375 27,375

52,000 -91,385 2,05,785

Working Notes: (1) Opening balance of Rs 3,750 in interest column represents accrued interest for 3 months (Jan + Feb + March). Accrued interest = Rs 1,00,000 × 15/100 × 3/12 = Rs 3,750. (2) On 1 st May, 2007, 500 debentures were purchased cum-interest. It means that the total payment of Rs 53,500 includes interest accrued upto 30th April, 2007. The amount of accrued interest = Rs 50,000 × 15/100 × 4/12 = Rs 2,500. Therefore, cost of investment will be: Rs 53,500 – Rs 2,500 = Rs 51,000.



(3) On 30th June 2007, interest will be received on entire debentures holding on that date including new purchase for 6 months. The amount of interest = Rs 1,50,000 × 15/100 × 6/12 = Rs 11 ,250. (4) On 1st November 2007, 600 debentures were sold ex-interest at Rs 57,300. It means that the accrued interest of Rs 3,000 (Rs 60,000 × 15/100 × 4/12) were also received in addition to Rs 57,300. Loss on Sale of 600 debentures on 1.11.2007 Rs Sale Proceeds 57,300 Less: Average Cost: Rs 1,05,000 + Rs 51,000 × 600 = Rs 104 × 600 62,400 1,000 + 500 . Loss on Sale 5,100. Closing value of 900 debentures = Rs 104 × 900 = Rs 93,600. (5) On 30th November 2007, 400 debentures were purchased ex-interest at Rs 38,400. It means that the accrued interest of Rs 2,500 (Rs 40,000 × 15/100 × 5/12) were also paid in addition to Rs 38,400. (6) On 31st December 2007, 400 debentures were sold cum-interest at Rs 55,000. It means that the accrued interest of Rs 3,000 (Rs 40,000 × 15/100 × 6/12) were received, which is included in Rs 55,000. Therefore, the effective sale proceeds is Rs 55,000 – Rs 3,000 = Rs 52,000. Profit on sale of 400 debentures on 31.12.07 Rs Sale Proceeds 52,000 Less: Average Cost: Rs 93,600 + Rs 38,400 × 400 = Rs 101.54 × 400 40,615 900 + 400 . Profit on Sale 11,385 (7) On 31st December 2007, interest will be received on entire d ebentures holding on that date i.e., Rs 90,000 . Interest for 6 months = (90,000 × 15/100 × 6/12) = Rs 6,750. (8) On 31st March 2008, accrued interest will be for 3 months = Rs 90,000 × 15/100 × 3/12 = Rs 3,375. Balance of investment on 31 st March, 2008 = Rs 101.54 × 900 = Rs 91,385. Q.14. Mr. T purchased 1,000 nos. 10% debentures of Rs. 100 each on 1st April, 2009 at Rs. 96 cum-interest, the previous interest date being 31st December, 2008. Compute cost of investment. Ans:

Total amount payable 1,000 × 96 = Less: Interest included in the price for January, February and March i.e. 1,00,000 ×

10 100

Cost of the Investment

×

3 12

=

96,000

2,500 93,500

Q.15. Mr. X purchased 1,000, 6% Government Bonds of Rs. 100 each on 31st January,2009 at Rs. 95 each. In terest is payable on 30th June and 31st December. The price quoted is cum interest. Journalise the transaction. (vi) An unquoted long-term investment is carried in the books at cost of Rs. 2 lac. The published accounts of unlisted company received in May, 2009 sho wed that the company has incurred cash losses with decline market share and the long-term investment may not fetch more than Rs. 20,000. How you will deal with it in the financial statement of investing company for the year ended 31.3.2009. Answer: Journal Entry

Date

Particulars

31st Jan.

Investment A/c


Dr.

Amount (Dr.) Rs. 94,500


Amount (Cr.) Rs.

2009

Interest A/c (Rs. 1,00,000 ×

6 100

×

1 12

)

Dr.

500

95,000 To Bank A/c (Being purchase of 1,000, 6% Government bonds of Rs. 100 each at Rs. 95 each cum interest) (vi) According to AS 13 ‘ Accounting for Investments’, investment classified as 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 temporar y, in the value of the investments, such reduction being determined and made for each investment individually. According to this standard, indicators of the value of an investment are obtained by reference to its market value, the investee’s assets and r esults and the expected cash flows from the investment. The facts of given situation clearly suggest that there is decline in the market share of the company and the investment will not fetch more than Rs. 20,000. Therefore, the provision of Rs. 1,80,000 should be made to reduce the carrying amount of long term investment to Rs. 20,000 in the financial statements for the year ended 31 st March, 2009.

Q.16. On April 1, 2007, Mr. Shalendra had 20,000 Equity Shares in X Ltd. Face value of the shares was Rs 10 each but their book value was Rs 16 per share. On June 1, 2007, Mr. Shalendra purchased 5,000 Equity Shares more in X Ltd. @ Rs 14 each. On September 1, 2007, X Ltd. declared 15% dividend for the year 2006-07. Mr. Shalendra received the same on September 20, 2007. Show Investment Account upto September 20,2007. Solution In the books of M r. Shalendra Investment in Equity Shares of X Ltd. Account Cr.

Dr.

Date

Particulars

Nominal Dividend Cost Date Particulars Nominal Dividend Cost value (Rs) (Rs) value (Rs) (Rs) 1.4.07 To Bal b/d 2,00,000 -- 3,20,000 20.9.07 By Bank A/c (N 30,000 7,500 1.6.07 To Bank A/c 50,000 -70,000 1) Tutorial Note: 1. Mr. Shalendra was holding 20,000 Equity Shares of X Ltd. on 1 st April, 2007. Any dividend in respect of these shares will be treated as dividend from post-acquisition profit. He acquired 5,000 Equity Shares of X Ltd. on 1 st June, 2007. The dividend in respect of these shares will be treated as dividend from pre-acquisition profit. Therefore, Rs 30,000 (Rs 2,00,000 × 15/100) d ividend will be credited to Income Account and Rs 7,500 (Rs 50,009 × 15/100) dividend will be credited to Investment Account (cost column). Bonus Shares Bonus shares are issued by capitalizing free reserves. A business receives Bonus shares on the basis of existing holding, at no cost. Therefore, only the nominal value column of the Investment Account needs amendment. The total nominal value of shares received as bonus will appear in nominal value column only and nothing is recorded in the cost column. In effect, the average cost of the existing shares are reduced. Q.17. On April 1, 2007, Mr. Shalendra had 20,000 Equity Shares in X Ltd. Face value of the shares was Rs 10 each but their book value was Rs 16 per share. On June 1, 2007, Mr. Shalendra purchased 5,000 Equity Shares in X Ltd more @ Rs 14 each. On June 30, 2007, the directors of X Ltd. announced a bonus issue. Bonus was declared at the rate of one Equity Shares for every five shares held and these shares were received on August 2, 2007. Show Investment Account upto August 2, 2007. Ans:Dr.

Date

Particulars

1.4.07

To Balance b/d

Nominal Value 2,00,000


In the books of M r. Shalendra Investment in Equity Shares of X Ltd. Account Cr. Dividend Cost Date Particulars Nominal (Rs) (Rs) Value -- 3,20,000

Dividend (Rs)


Cost (Rs)

1.6.07 2.8.07

To Bank A/c 50,000 -70,000 To Bonus Shares 50,000 --A/c Teaching Note: Mr. Shalendra will receive 25,000 × 1/5 = 5,000 shares of Rs 10 each as Bonus Shares at no cost.

Q.18. On 1.4.2007, X Limited had 10,000 equity shares of XYZ Limited, purchased at Rs 12 each (face value being Rs 10 per share). On 1.1.2008, XYZ Limited offered two rights shares for every five shares h eld at a premium of Rs 3 per share. X Limited, however, sold these rights entitlement in the market at Rs 2 p er share. On 1.2.2008 immediately after the shares became ex-right, the market price of the shares fell to Rs 11.50 each. Show Investment Account up to 1.2.2008. Ans:Dr.

Date

Particulars

1.4.07

To Bal b/d

No. of Shares 10,000

In the books of X Ltd. Investment in Equity Shares of XYZ Ltd. Account Cr. Dividend Cost Date Particulars No. of (Rs) (Rs) Shares -- 1,20,000 1.2.08 By Bank A/c (N -1) 10,000 By Bal c/d -- 1,20,000 10,000

Dividend (Rs) ---

Cost (Rs) 5,000 1,15,000

10,000 -- 1,20,000 Working Note: Rs (1) Sale of rights: 10,000 / 5 × 2 × Rs 2 8,000 Less: Adjustment for fall in price (10,000 × 0.50) 5,000 Amount credited to Profit and Loss Account 3,000 Teaching Note: If in the above Illustration, the entire rights entitlement were sold for Rs 3,000 (instead of Rs 8,000), the balance of the investments would be shown at Rs 1,17,000 (Rs 1,20,000 – Rs 3,000), the income from sale of rights being adjusted against cost. Q.19. Gamma Investment Company hold 1,000, 15% debentures of Rs. 100 each in Beta Industries Ltd. as on April 1, 2009 at a cost of Rs. 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 Rs. 53,500. On November 1, 2009, 600 debentures are sold ex-interest at Rs. 57,300. On November 30, 2009, 400 debentures are purchased ex-interest at Rs. 38,400. On December 31, 2009, 400 debentures are sold cum-interest for Rs. 55,000. Prepare the investment account showing value of holdings on March 31, 2010 at cost using FIFO method. Ans: In the books of Gamma Investments Ltd. Investment Account (15% Debentures in Beta Industries Ltd.) Date Particulars Nominal Interest Cost Date Particulars Nominal value Rs. Rs. value Rs. Rs. 1.04.09 To Balance b/d 1,00,000 3,750 1,05,000 30.06.09 By Bank A/c -1.05.09 To Bank A/c 50,000 2,500 51,000 1.11.09 By Bank A/c 60,000 30.11.09 To Bank A/c 40,000 2,500 38,400 1.11.09 By Profit & 31.12.09 To Profit & Loss 10,000 Loss A/c 31.03.10 A/c -18,625 31.12.09 By Bank A/c 40,000 To Profit & Loss 31.12.09 By Bank A/c -A/c 31.03.10 By Bank A/c 90,000 1,90,000 27,375 2,04,400 1,90,000 Working Notes:

1. 2.

Accrued interest as on 1.4.09 = Rs. 1,00,000 × Accrued interest = Rs. 50,000 ×

15 100

×

4 12

15 100

×

3 12

Interest

11,250 3,000

3,000 6,750 3,375 27,375

= Rs. 3,750.

= Rs. 2,500

Cost of investment for purchase on 1.5.09 = Rs. 53,500 – Rs. 2,500 = Rs. 51,000



Cost

-57,300 5,700 52,000 -89,400 2,04,400

15

×

6

3.

Interest received = Rs. 1,50,000 ×

4.

Accrued interest = Rs. 60,000 ×

5.


6.


7.

Sale price of investment on 31.12.09 = Rs. 55,000 – Rs. 3,000 = Rs. 52,000

8.


9.


100 15 4

100 15 100 15 100

15 100 15 100

×

×

× ×

= Rs. 11,250

= Rs. 3,000

12 5

×

12

12 6 12

6 12 3 12

= Rs. 2,500 = Rs. 3,000 = Rs. 6,750 = Rs. 3,375

10. Cost of investment as on 31.3.10 = Rs. 51 ,000 + Rs. 38,400 = Rs. 89,400 11. Loss on debentures sold on 1.11.2009: Sales price of debentures Less: Cost of investment sold =

 .1,05,000

1,000

× 600 =

Loss on sale 12. Profit on debentures sold on 31.12.2009: Sales price of debentures Less: Cost of investment sold = Profit on sale


 .1,05,000

1,000

Rs. 57,300 Rs. 63,000 Rs. 5,700 Rs. 52,000

× 400 =

Rs. 42,000 Rs. 10,000


Investment Accounting

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