Investment Accounting

Investment Accounting CA – IPCC – Accounting – Gr1

Investment Accounting

Investments Accounting

ACCOUNTING

STANDARD – 13

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.

Forms 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.

Classification of

Investments

Investments are classified as Long Term Investments and Current Investments.

Cost of Investments The cost of an investment includes acquisition charges such as brokerage, fees and duties.

If an investment is acquired by the issue of 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

Investments

The carrying amount for current investments is the lower of cost and fair value.

Any reduction to fair value and any reversals of such reductions are included in the profit and

loss statement.

Long-term

Investments Long-term investments are usually carried at cost. There is a permanent decline in the value of

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.

Q.1. Banana Ltd. On 1st 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 31st May, 1993 the company purchased the same

Government loan of the face value of Rs. 80,000 at Rs. 95 (net) cum interest. On 1st June 1993 Rs. 60,000 face value of the

loan was sols at Rs. 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. Rs. 40,000 face value of the loan was sold at Rs. 97 (net) cum interest. On 1st December

1993 the company purchased the same loan Rs. 10,000 at par ex interest. On 1st 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 31st 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


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

Cr.

Date Particular Nominal

Value

Rs.

Interest

Amount

Rs.

Principal

Rs.


Value

Rs.

Interest

Value

Rs.

Principal

Amount

Rs.

1993

April

1

May.

31

Dec. 1

1994

Mar.

31

To Balance

b/d

To Bank A/c

To Bank A/c

To Income

from

investment

A/c

2,00,000

80,000

10,000

--

4,500

3,000

375

18,525

1,90,000

73,000

10,000

--

1993

June 1

June 30

Nov. 30

Dec. 31

1994

Mar.1

Mar.31

Mar. 31

By Bank A/c

By Bank A/c

(Interest for

6 months)

By Bank A/c

By Bank A/c

(Interest fro

6 months)

By Bank A/c

By P&L A/c

(Loss on

sale)

By Balance

c/d

60,000

40,000

--

10,000

--

1,80,000

2,250

9,900

1,500

8,550

150

--

4,050

56,400

--

37,300

--

9,500

1,300

1,68,500

2,90,000 26,400 2,73,000 2,90,000 26,400 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 31st 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 1st 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 31st 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.

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

[Scrip: 5% Bharat Debenture Stock]

[Interest Payable on 31st March and 30th September]

Date Particulars Nominal

Value

Rs.

Interest

Rs.

Cost

Rs.


Value

Rs.

Interest

Value

Rs.

Cost

Rs.

01.03.01

30.09.01

31.12.01

To Bank

A/c

To Bank

A/c

To P&L

A/c

24,000

8,000

--

500

200

908

21,552

7,436

--

31.03.01

01.09.01

30.09.01

01.12.01

31.12.01

31.12.01

By Bank A/c

[Rs. 24,000

* 5% * 6/12]

By Bank A/c

By Bank A/c

[Rs. 22,000

* 5% * 6/12]

By Bank A/c

By P&L A/c

(Loss)

By Balance

c/d

--

10,000

--

6,000

--

16,000

600

208

550

50

--

200

--

9,016

--

5,477

335

14,160

32,000 1608 28988 32,000 1,608 28,988

Working Notes:

(i) Cost of Debenture stock purchased on 1st March


= 90% of Rs. 24,000 + 2% of Rs. 21,600 + Rs. 20 – Rs. 500 ( Interest)

= Rs. 21,552

(ii) Sale Proceeds of Debentures stock sold on 1st Sept.

= 92% of Rs. 10,000 + 2% of Rs. 9,200

= Rs. 9,016

(iii) Cost of Debentures Stock purchased on 30th 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.

Investment A/c in the Books of Sri Devi

For the year ending on 31st Dec. 2001

[Scrip: Equity Shares of Tata Ltd.]


Value

Rs.

Price

Rs.


Value

Rs.

Price

Rs.

01.01.01

30.11.01

31.12.01

To Bank A/c

To Bonus Sh.

To P&L A/c

50,000

25,000

--

61,500

--

1,550

31.12.01

31.12.01

By Bank A/c

By Balance

c/d

25,000

50,000

22,050

41,000

75,000 63,050 75,000 63,050

Working Notes:

(i) Cost of Equity Shares purchased on 1st 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 31st 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.

Investment A/c for the year ending on 31st Dec. 1996

[Equity Shares in C Ltd.]

Date Particulars No. Divi Amount Date Particulars No. Divid Amount

01.04.96

20.06.96

16.08.96

30.09.96

15.11.96

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

44,444

30.09.96

31.10.96

15.11.96

31.12.96

By Bank (Sale of

right

By Bank (divid.

on shares acquired

on 2nd june)

By Bank

(Sale of shares)

By Balance c/d

25,000

20,000

10,000

50,000

10,000

3,75,000

2,64,444

45,000 60,000 6,55,000 45,000 60,000 6,55,000

P&L A/c

Particulars Rs. Particulars Rs

To Balance c/d 1,04,444 By Profit Transferred

By Dividend

50,000

4,444

1,04,444 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 31st March, 2008.


Ans:-

In the books of Investor Ltd.

8% Bonds Account

Dr. [Interest Payable : 1st November & 1st May] Cr.


value (Rs)

Interest

(Rs)

Cost

(Rs)


Value (Rs)

Interest

(Rs)

Cost

(Rs)

1.4.2007

1.10.2007

31.3.2008

To Bank A/c (N 1)

To P&L A/c (N 2)

To P & L A/c

1,200

--

--

40

--

84

926

11.5

1.5.2007

1.10.2007

1.11.2007

31.3.2008

By Bank A/c

By Bank A/c (N 2)

By Bank A/c (N 3)

By Bal c/d (N 4)

--

300

--

900

48

10

36

30

--

243

--

694.5

1,200 124 937.5 1,200 124 937.5

Dr. Investment in Equity Shares of X Ltd. Account

Cr.

Date Particulars No. Dividend

(Rs)

Cost (Rs) Date Particulars No. Dividend

(Rs)

Cost (Rs)

12.4.2007

15.5.2007

15.5.2007

31.3.2008

To Bank A/c

To Bonus issue A/c

To P&L A/c

To P&L A/c

1,00,000

1,50,000

--

--

--

--

--

2,25,000

40,00,000

--

5,00,000

--

15.5.2007

1.12.2007

31.3.2008

By Bank A/c

By Bank A/c

By Balance c/d

1,25,000

--

1,25,000

--

2,25,000

--

25,00,000

--

20,00,000

2,50,000 2,25,000 45,00,000 2,50,000 2,25,000 45,00,000

Dr. Investment in Equity Shares of C Ltd. Account

Cr.


(Rs)

Cost

(Rs)


(Rs)

Cost

(Rs)

1.7.2007

31.3.2008

To Bank A/c

To P&L A/c

50,000

--

--

62,500

3,87,500

--

1.3.2008

31.3.2008

By Bank A/c

By Bal c/d

--

50,000

62,500

--

--

3,87,500

50,000 62,500 3,87,500 50,000 62,500 3,87,500

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., 1st 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 .

Profit on Sale 11,500

(3) On 1st 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 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 Rs. 175 per share and Rs. 90 per share

respectively. On 31st March, 2009, Mr. Aman sold bonus 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


For the year ended 31st March, 2009

(Scrip: Equity Shares of X Ltd.)


Value (Rs.)

Cost (Rs.) Date Particulars Nominal

Value (Rs.)

Cost (Rs.)

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)

5,00,000

2,50,000

--

6,15,000

15,500

31.3.09

31.3.09

By Bank A/c

(W.N.2)

By Balance c/d

2,50,000

5,00,000

2,20,500

4,10,000

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

= 5,000 × Rs. 120 – 2% of Rs. 6,00,000 + 1

2% of Rs. 6,00,000 = Rs. 6,15,000

2. 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

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

7,50,000 ) = Rs. 15,500

4. 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 31st March, 2009.

Answer:

Calculation of Cost of Investment

Particulars Rs.

Purchase price of Equity shares of YZ Ltd. (200 shares × Rs. 105 per share)

Add: Brokerage, Stamp duty and STT

21,000

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 30th September and 31st March.

Mr Investor closes his books every 31st December.

Show the Investment account as it would appear in his books.

Ans

Dr. Investment in 6% Government Bonds Account

Cr.


Rs.

Interest

Rs.

Principal

Rs.


Rs

Interest

Rs

Principal

Rs

1995 1995


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

To Income

from

Investment

A/c

60,000

10,000

--

5,000

--

--

900

250

--

--

--

3,375

59,000

9,800

333

4,900

134

--

Mar

31

July 1

Sep 30

Nov 1

Dec

31

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 75,000 4,525 74,167

Q.9.

Delhi Investments held 400. 12 percent debentures of Rs. 100 each in Acme Ltd. as on 1st April, 1995 at a cost of Rs.

50,000. Interest is payable on 30th June and 31st December, each year. On 1st June 1995, 200 debentures are purchased cum-

interest 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 31st December, 1995. 300 debentures are sold cum-interest or Rs. 32,250.

Prepare investment account valuing closing stocks as on 31st 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 30th June & 31st Dec.)


Rs

Interest

Rs

Principal

Rs


Rs

Interest

Rs

Principal

Rs

1995

April 1

June 1

Nov

30

Dec 31

To Balance b/d

To Bank

To Bank

To P&L A/c

(Profit

transferred)

40,000

20,000

20,000

--

1,200

1,000

1,000

5,200

50,000

20,400

19,200

--

1995

June

30

Nov 1

Dec

31

1996

Mar

31

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)

By Balance c/d

--

30,000

--

30,000

--

--

20,000

3,600

1,200

--

1,800

--

1,200

600

--

28,650

8,850

30,450

\2,450

--

19,200

80,000 8,400 89,600 80,000 8,400 89,600

Q.10. 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

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 3rd April

and 4th October respectively. The Price of the security on 31.12.1992, was Rs. 96.

Investors Ltd. closes its books on 31st December each year. Draw up the Investment Account in the books of Investors

Ltd.


Ans.

In the books of Investors Ltd.

Investment Account

(12% Govt. Security: tax free)


Rs

Interest

Rs

Principal

Rs


Rs.

Interest

Rs.

Principal

Rs.

1992

Jan 1

June 1

Dec 31

To Balance b/d

To Bank

To P&L A/c

(Int.

transferred)

60,000

40,000

-

1,800

800

7,300

56,500

38,765

--

1992

Apr 3

July

31

Oct 4

Dec 1

Dec

31

Dec

31

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)

--

50,000

--

20,000

--

30,000

3,600

2,000

3,000

400

--

900

--

46,305

--

18,800

1,360

28,800

1,00,000 9,900 95,265 1,00,000 9,900 95,265

1. [(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 balance

in one call after a month. These shares are not to rank for dividend for the year ending 30th June, 1995.2,000 Right Shares were

taken up by X Ltd. balance 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 30th June, 1995. Make out the Investment

Account in the books of X Ltd. Ignore Income-Tax.

Ans.

In the Books of X Ltd.

Investment Account


Rs.

Interest

Rs

Principal

Rs


Rs.

Interest

Rs.

Principal

Rs.

1995

Jan 1

May

15

June

15

Dec 31

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)

1,00,000

50,000

20,000

-

-

-

-

-

-

-

-

28,000

1,25,000

-

14,000

12,000

-

-

1995

May 25

Oct 15

Dec 31

By Bank

(4,000 Right

shares sold @

Rs.2)

By Bank

(Dividend

received @

20% on Rs.

1,00,000)

By Balance c/d

-

-

1,70,000

8,000

20,000

-

-

-

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 31st 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 31st December 200

Ans:-

In the books of MN Ltd.

6% Stock Account

Dr. [Interest Payable: 31st March & 30th September]

Cr.


value

Interest

(Rs)

Cost

(Rs)


value

Interest

(Rs)

Cost

(Rs)

1.3.07

15.6.07

1.8.07

1.9.07

1.12.07

31.12.07

To Bank A/c (Note 1)

To Profit & Loss A/c

(Note 2)



(Note 5)



24,000

--

6,000

--

12,000

--

600

--

120

--

120

1,005

21,840

25

5,490

74

11,190

--

31.3.07

15.6.07

1.9.07

30.9.07

31.12.07

By Bank A/c (Note 2)




By Bal c/d (Note 8)

--

10,000

4,000

--

28,000

720

125

100

480

420

--

9,125

3,720

--

25,774

42,000 1,845 38,619 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 debentures are sold cum-interest for Rs 55,000.

Prepare the Investment Account upto March 31, 2008.

Ans:-

In the books of Kanpur Investments Ltd.

15% Debentures in Udaipur Industries Ltd. Account

Dr. [Interest Payable : 30th June & 31st December]

Cr.


Value

Interest

(Rs)

Cost

(Rs)


Value

Interest

(Rs)

Cost

(Rs)

1.4.07

1.5.07

30.11.07

31.12.07

31.3.08

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

1,00,000

50,000

40,000

--

--

3,750

2,500

2,500

--

18,625

1,05,000

51,000

38,400

11,385

--

30.6.07

1.11.07

1.11.07

31.12.07

31.12.07

31.3.08

By Bank A/c (N 3)

By Bank A/c (N 4)

By Profit & Loss

A/c (Note 4)

By Bank A/c (N 6)

By Bank A/c (N 7)

By Bal c/d (N 8)

--

60,000

--

40,000

--

90,000

11,250

3,000

--

3,000

6,750

3,375

--

57,300

5,100

52,000

--

91,385

1,90,000 27,375 2,05,785 1,90,000 27,375 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 1st 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 debentures 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 31st 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 = 96,000

Less: Interest included in the price for

January, February and March

i.e. 1,00,000 × 10

100 ×

3

12 = 2,500

Cost of the Investment 93,500

Q.15. Mr. X purchased 1,000, 6% Government Bonds of Rs. 100 each on 31st January,2009 at Rs. 95 each. Interest 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 showed 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 Amount (Dr.)

Rs.

Amount

(Cr.) Rs.

31st Jan. Investment A/c Dr. 94,500


2009 Interest A/c (Rs. 1,00,000 × 6

100 ×

1

12) Dr.

To Bank A/c

(Being purchase of 1,000, 6% Government bonds of Rs. 100 each at Rs. 95 each

cum interest)

500

95,000

(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 temporary, 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 results

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 31st 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 Mr. Shalendra


Cr.


value

Dividend

(Rs)

Cost

(Rs)


value

Dividend

(Rs)

Cost

(Rs)

1.4.07

1.6.07

To Bal b/d

To Bank A/c

2,00,000

50,000

--

--

3,20,000

70,000

20.9.07 By Bank A/c (N

1)

30,000 7,500

Tutorial Note: 1. Mr. Shalendra was holding 20,000 Equity Shares of X Ltd. on 1st 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 1st

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) dividend 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:-

In the books of Mr. Shalendra


Cr.


Value

Dividend

(Rs)

Cost

(Rs)


Value

Dividend

(Rs)

Cost

(Rs)

1.4.07 To Balance b/d 2,00,000 -- 3,20,000


1.6.07

2.8.07

To Bank A/c

To Bonus Shares

A/c

50,000

50,000

--

--

70,000

--

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 held at a premium of Rs 3 per share. X Limited,

however, sold these rights entitlement in the market at Rs 2 per 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:-

In the books of X Ltd.

Dr. Investment in Equity Shares of XYZ Ltd. Account

Cr.

Date Particulars No. of

Shares

Dividend

(Rs)

Cost

(Rs)

Date Particulars No. of

Shares

Dividend

(Rs)

Cost

(Rs)

1.4.07 To Bal b/d 10,000 -- 1,20,000 1.2.08 By Bank A/c (N

1)

By Bal c/d

--

10,000

--

--

5,000

1,15,000

10,000 -- 1,20,000 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.)


value

Rs.

Interest

Rs.

Cost

Rs.


value

Rs.

Interest Cost

1.04.09

1.05.09

30.11.09

31.12.09

31.03.10

To Balance b/d

To Bank A/c

To Bank A/c

To Profit & Loss

A/c

To Profit & Loss

A/c

1,00,000

50,000

40,000

--

3,750

2,500

2,500

18,625

1,05,000

51,000

38,400

10,000

30.06.09

1.11.09

1.11.09

31.12.09

31.12.09

31.03.10

By Bank A/c

By Bank A/c

By Profit &

Loss A/c

By Bank A/c

By Bank A/c

By Bank A/c

--

60,000

40,000

--

90,000

11,250

3,000

3,000

6,750

3,375

--

57,300

5,700

52,000

--

89,400

1,90,000 27,375 2,04,400 1,90,000 27,375 2,04,400

Working Notes:

1. Accrued interest as on 1.4.09 = Rs. 1,00,000 × 15

100 ×

3

12 = Rs. 3,750.

2. Accrued interest = Rs. 50,000 × 15

100 ×

4

12 = Rs. 2,500

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


3. Interest received = Rs. 1,50,000 × 15

100 ×

6

12 = Rs. 11,250


100 ×

4

12= Rs. 3,000


100 ×

5

12 = Rs. 2,500


100 ×

6

12 = Rs. 3,000

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


100 ×

6

12 = Rs. 6,750


100 ×

3

12 = 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 Rs. 57,300

Less: Cost of investment sold = 𝑅𝑠 .1,05,000

1,000 × 600 = Rs. 63,000

Loss on sale Rs. 5,700

12. Profit on debentures sold on 31.12.2009:

Sales price of debentures Rs. 52,000

Less: Cost of investment sold = 𝑅𝑠 .1,05,000

1,000 × 400 = Rs. 42,000

Profit on sale Rs. 10,000

Investment Accounting

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