Prof. Bhambwani’s
RELIABLE /T.Y.B.COM / A/C-I / INVESTMENT ACCOUNTING
Investment means asset held by an enterprise for earning income by way of dividend, interest and capital appreciation.
Investment in shares gives income by ways of dividend.
Investment in debentures and loan gives income by way of interest.
Investment in property which is to be let out gives income by way of rent.
1.Investment in debentures or loans:
(a)Investment in debentures or loans gives interest income.
(b)Interest is paid by the company on face value of debentures.
(c)Interest is paid by the company on fixed dates. E.g. A company pays interest on 30th June and 31st December.
(d)Interest accrues on debentures evenly
(e)The company will pay interest on due dates. Interest will be paid by the company to those
persons who are holding debentures on the due date of interest.
E.g.: A company pay interest on debentures on 30th June and 31stDecember. Mr. X purchases debentures of face value of Rs.1,00,000 at Rs.90,000.
The debentures are purchased from open market 1st Nov. 09. In such a case, the company will pay him interest on 31st December for the entire period of 6 months i.e. from 1st July 2009 to 31st Dec. 2009 and such interest will be paid on face value.
Transactions in Connection with Debentures:
1)Purchase of Debentures:
When debentures are purchased the seller of debentures will demand price of debentures + Interest accrued till the date of purchase.The price of debentures without accrued interest to known as `Ex-interest price’ & price of debentures with interest is known as `cum-interest purchase price’.
E.g.:Tata Ltd. pays interest on 30th June and 31st December .Mr. A purchases 20thDecember of the company on 1st Nov having a face value of 100 each. The rate of interest is 12% p.a. and debentures are purchased at 97 ex-interest.
Solution: Face value = 20 Debenture X 100 = 2,000
Ex interest purchase price 20 X 97=1940
(+) Interest 2000 X 12% X 4/12=80
Cum interest price2020
Investment in debentures a/c 1940
Interest a/c80
To Cash/Bank a/c2020
2)Interest is received:
On the due date the company will pay interest. Interest will be paid on face value. Interest will be paid for the entire period since the last payment of interest. Interest would be paid to those persons who are holding debentures on the due date 2000 X 12% X 6/12 = 120
In the above example if interest is received on debentures on 31st December 2010 The amount of interest will be Rs 20,000 x 12% x 6/12
Cash a/cDr.120
To Interest a/c120
3)Sale of Investments:
When investment are sold the seller will receive price of debentures+ Interestaccrued till the date of sale. The price of debentures without interest is known as `Ex-interest selling price’ and price of debenture with interest as’ com-interest selling price’. In the above eg. if debenture purchased on 1st Nov. 2010 are sold on 1st April, 06 eg: 15 debentures are sold at 102 ex-interest.
Sale of debentures on 1-4-2003
Face value = 15 Debenture X 100 = 1500
Ex interest price = 15 X 102 = 1530
(+) Interest = 1500 X 12 % X 3/12 = 45
Cum interest price (SP) 1,575
Cash a/c Dr.1,575
To Interest a/c45
To Debentures a/c1,530
Profit or loss on sale:
Compare:
Ex-Interest S.P. & Ex-interest purchase price
Ex-Interest S.P. = 1,530
Ex-Interest cost = 1,455 (W.N)
Purchase price.
20 Debentures – 194075 (profit)
15 Debentures (?) (1,455)
Entry for profit
Investment in debentures a/c Dr.75
To P & L a/c75
Brokerage paid at the time of purchase or sale of debentures
1)Brokerage paid at the time of purchase is added to the cost:-
2)Brokerage paid of the time of sale is deducted from selling price.
3)Addition or deduction of Brokerage should be done before adjustment of Interest.
4)Brokerage is calculated on face value or on Ex-interest price.
INVESTMENT IN SHARES
Shares will give income by way of dividend. Dividend on equity shares is not fixed.
Dividend is declared nearly six months after the year end.
Transaction in shares:-
1)Purchase of shares
2)Bonus shares are received.
3)Right shares are offered.
a)Subscribe for right shares.
b)Sale rights by transferring rights to others.
4)Dividend is received.
-pre acquisition dividend
-Post acquisition dividend
5)Shares are sold
Rights:-
1)Purchase of Share:
Investment in shares a/cDr.
To Cash/Bank a/c
Investment in shares a/c is debited with cost of shares + Brokerage + stamp duty.
The share purchased may be ex-right or cum-right. Shares are said to be ex-right when no rights have been announced at the time of purchase.
Shares are said to be cum-right if at the time of purchase of shares, right have been announced but letter offering right is not received.
2)Bonus shares when bonus shares are received, the no. of shares will increase without corresponding increase in cost.
(No entry)
3)Rights are offered:
Right means an offer made by the company to its existing shareholders.
The company offers the shareholders to purchase shares at a fixed price. The shareholder who has been offered rights has the following options:-
Subscribe for rightsSale of rights
Investment in shares (Renounce rights)
To Cash/Bank
Cash a/c Dr.If 2 conditions are satisfied
To P & L a/c1) Shares were purchased
Cum-rights cost ex-
announcement of right
before receiving offer ICH ex.
2)After receiving rights,
Market price of original shares
Cash a/c---dr
To Investments
DIVIDEND ON SHARES
Company will give dividend only on shares which are issued by the company till the end of dividend period. E.g. if dividend period is 06-07, the company will give dividend only on these shares which have been issued by the company till 31-3-07. The company will not give dividend for the year 2006-07. On those shares which have been issued after 31-3-2007.
If shares issued by the company upto the end of dividend period are held by the investor during the dividend period, in such a case, dividend on such shares will be treated as income.
If shares issued by the copany till the end of dividend period are not held by the investor in dividend period, dividend on such shares is treated as pre acquisition period and such dividend is credit to invest.
E.g.: Mr. A enters into the following transactions.
1-1-03-200 shares are held
1-3-03-300 share are purchased
1-6-03-500 shares are purchased
1-7-03-600 share are received as bonus shares.
1-8-03-700 shares are received as right shares
30-9-03-Dividend is declared for the year 2002-03.
Op.P P P B R D Q
1-1-031/331/31/51/61/71/830/931/3
200300400500600700
Particulars / 200sha. / 300 sha / 400 sha / 500 sha / 600 sha / 700
sha
Well shares issued by the co. upto 31-3-03 ? / Y / Y / Y / Y / N / N
Wills shares held by us in 02-03 / Y / Y / N / N / Na / Na
Cash a/c Dr.Cash a/cDr.
To P & L a/c To Investment a/c
(Pre acquisition dividend)
INVESTMENT IN DEBENTURES AND LOANS
Q1.Mr. A held on 1st January 1972 Rs.1,00,000 of 3% Government loans at Rs.95,000. Three months interest had accrued. On 31st May he had purchased further Rs.40,000 of the loan at Rs.96 (net) cum-interest. On 31st July Rs. 30,000 of the loans was sold at Rs.94 (net) ex-interest. On 30th November Rs. 20,000 of the loans was sold at Rs.96(net) cum-interest. Interest on the loans was paid each year on 31st March and 30th September and was collected on 4th April and 5th October. The price of the loans on 31st December 1972 was Rs. 96. Draw up the loans account. Ignore income-tax and paise.
Q2.Calcutta investments hold 400, 12% debentures of Rs.100 each in Acme Limited 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 at Rs.21,400. On 1st November 1995, 300 debentures are purchased ex-interest at Rs.29,200. On 31st December 1995, 300 debentures are sold ex-interest at Rs.28,650. On 30th November 1995, 300 debentures are sold cum-interest for Rs.32,350.
Prepare investment account valuing closing stocks as on 31st March, 1996 at cost (applying Weighted average Method) or market price whichever is lower. The debentures were quoted at par on 31st March, 1976. (SNM 2.332)(A-55)
Q3.B. Finance Ltd. held on 1st April, 1990, Rs.1,00,000 of 12% units of Unit Trust of India (1994) at Rs.95,000. There months interest had accried as interest was receivable half yearly on 30th June and 31st December. All cheques for half yearly interest had been sent by Unit Trust of India in advance and hence bank could credit the finance company’s account on the dates of interest themselves.
On 31st August, 1990, the company purchased a further Rs.40,000 of the Units at Rs.96 (net) cum-interest. On 31st October, 1990, Rs. 30,000 of the Units were sold at Rs.94 (net) ex-interest. On 28th February, 1991, Rs. 20,000 of the Units were sold at Rs. 96 (net) cum-interest.
On 31st March, 1991, the market price of the Unit was Rs.96. The face value of each unit was Rs. 100. Prepare the 12% Units Account for the year ended 31st March, 1991.
Q4.Bangalore Investments hold 1,200-6% Debentures of Rs.100 each in Minerva Ltd. as on 1st April 2004 at a cost of Rs.1,40,000. Interest is payable on 30th June and 31st December each year. Other details are as under:
Date / Details / Rs.01-06-2004 / 400 Debentures are purchased cum interest at / 40,800
01-11-2004 / 400 Debentures are purchased ex-interest at / 38,400
30-11-2004 / 600 Debentures are sold cum-interest for / 64,500
31-12-2004 / 800 Debentures are sold ex-interest for / 77,300
Prepare Investment Account valuing closing balance on 31-3-2005 at cost or market price whichever is lower.
The debentures are quoted at par on 31-3-2005. (APRIL 06)
Q5.Miss Bhagwati entered into the following transactions of purchase and sales of 12% Debentures of Rs.100 each of Mansi Ltd. Interest is payable on 30th June and 31st December every year. Transactions.
Date / No. of Debentures / Terms1-4-2005 / 800 / Opening Balance at a cost of rs.76,000
1-6-2005 / 300 / Sold at Rs.105 each cum-interest
1-9-2005 / 700 / Purchased at Rs.98 each Ex-Interest
1-12-2005 / 400 / Purchased at Rs.108 each Cum-Interest
1-2-2006 / 900 / Sold at Rs.97 each Ex-interest
Prepare Investment Account of 12% Debentures in the books of Bhagwati for the year ended 31st March, 2006. The market value on 31st March, 2006 was Rs.67,500 of the said investment. Apply AS-13 (A-07)
Q6.Mr. M.N. bought and sold 6% Stock as follows, interest being payable on 31st March and 30th September each year.
March 1, 2001 Bought Rs. 24,000 @ Rs. 90.875 ex-interest.
June 15, 2001 Sold Rs. 10,000 @ Rs. 92.625 cum-interest.
Aug. 1, 2001 Bought Rs. 6,000 @ Rs. 91.375 ex-interest.
Sept. 1, 2001 Sold Rs. 4,000 @ Rs. 93.125 ex-interest.
Dec. 1, 2001 Bought Rs. 12,000 @ Rs. 94.125 cum-interest.
Prepare Investment Account for the year ended 31st December, 2001 assuming brokerage at 0.125% of nominal value of Rs. 100 each in each case. (Detailed working are to be given). (VC-11)
Q7. A purchased on 1st March, Rs. 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 Rs 20 and brokerage at 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 at 92 ex-interest less brokerage at 2%. On 30th September, Rs. 8,000 stock was purchased at 91 ex-interest plus brokerage at 2% and charges RS. 10. On 1st December, Rs. 6,000 stock was sold at 94 cum interest less brokerage 2% . The market price of stock on 31st December was 91%. Show the Investment Account for the year ended 31st December, marking all calculation in months.
Q8.Mr. Sudhanshu holds on 1st April 2001 Rs. 50,000 6% Gold Bonds, at a cost of Rs. 48,000, investments on which interest is payable on 1st Jan and 1st July each year.
Following are the transactions of sales and purchases of the same security during the year ended 31st March 2002.
Purchases
(i)On 1.5.2001 Face value Rs. 40,000 @ 102 cum-interest
(ii)On 1.11.2001 Face value Rs. 30,000 @ 101 ex-interest.
Sales
(i)On 1.8,2001 Face Value Rs. 30,000 @ 103 ex-interest
(ii)On 1.3.2002 Face value Rs. 40,000 @ 101 cum-interest.
Brokerage @1% was paid on sale and purchase of investments.
Income Tax is deducted on interest @10% by the Government.
Prepare investment account in the books of Mr. Sudhanshu.
INVESTMENT IN SHARES
Q9.A Ltd. purchases 10000 shares of X Ltd. @Rs.80 and paid brokerage @1.5% and stamp duties Rs.8,000 on 15-12-1999. The company purchases another 15000 shares of X Ltd. @Rs. 96 and paid brokerage @1.5% and stamp duties Rs.14400 on 25-12-1999. It sold 12000 shares @105 and brokerage @1.5% on 15-2-2000. (T-649)
Q10.Mr. Vishal purchases 5,000 shares of Jindal ltd. @Rs.85 and paid brokerage @1.5% and stamp duty of Rs.4,500 on 20-2-2001. Mr. Vishal purchases another 7,500 shares of Jindal Ltd. at Rs.96 and paid brokerage @1.5% and stamp duty of Rs.7,000 on 25-12-2001.
Mr. Vishal sold 6,000 shares @Rs.110 and paid brokerage @1.5% on 15-2-2002. The company issues one bonus share for every two shares held on 2-1-2002. Find out the cost of investment sold and the carrying amount of investment and profit or loss. (CC-821)
Q11.On 1-1-2001 Devilal Purchased 5,00,000 Equity shares of Rs.10 each in Satyam ltd. @Rs. 12 each. Broker charged commission @2% and he spent Rs.500 as cost of share transfer stamps.
On 30-11-2001 bonus of declared in the ratio of 1:2.
On 31-12-2001 Devilal sold bous shares @Rs. 9 per share.
Show the investment Account in the books of Devilal. (AP-578)
Q12.Radhe Shyam purchased 1,000 shares in Ranbaxy Laboratories Ltd. at Rs.600 per share in 1995. There was a rights issue in 1998 at one share for every two held at a price of Rs.150 per share. It Radhe Shyam subscribed to the rights what would be the carrying cost of 1,500 shares? If he sold the rights in the market at Rs.400 per share what would be the carrying cost of the original shares? (RLG – AS-93)
Q13.Gayathri Ltd. acquired 1,000 shares in Savitha Ltd., at a cum-right price of Rs.150 per share. Savitha Ltd. offered right shares of one for every two held by the equity shareholders at Rs.75 per share. The rights were sold by Gayathri Ltd. at Rs.40 per share. After the right issue the share price fell from Rs.150 to Rs.120 per share. What would be the carrying cost of investment in Savitha Ltd. after the sale of ‘rights’? (RLG AS-93)
Q14.On 1st April 2003, Singh 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 1st June 2003, Singh purchased 5,000 more equity shares in the company at a premium of Rs.4 per share.
On 30th June 2003, the directors of X 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 2003.
The terms of the rights issue were:
(a)Rights shares to be issued to the existing shareholders on 10th August 2003.
(b)Rights issue would entitle the holders to subscribe to additional equity shares at the rate of one share for every three shares held at Rs.15 per share-the whole sum being payable by 30th September 2003.
(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 Re. 1.50 per share.
(e)Dividends for the year ended 31st March 2003, at the rate of 15% were declared by the company and received by Singh on 20th October 2003.
(f)On 1st November 1975, Singh sold 20,000 equity shares at a premium of Rs.3 per share.
Show the investment account as it would appear in Sngh’s books as on 31-12-2003 and the value of shares held on that date. (BOOK 2)
Q15.Y Ltd. purchases 25,000 shares of Rs.10 each of X Ltd. on 15-4-1999 @Rs. 120 per share (cum-right cum-dividend). The company paid brokerage 1.5% and stamp duties 1%. It acquires another 30,000 shares of X Ltd. on 25-5-1999 @Rs. 140 per share (cum-right cum-dividend) and paid for brokerage and stamp duties. The company offered 1:1 right @Rs. 80 per share on 30-5-99. Y Ltd. acquired 35,000 shares exercising the right and sold the right for 20,000 shares @Rs. 30 per right. The company received dividend @40% on paid-up value of shares for 1998-1999. It sold 15,000 shares @Rs. 110 less brokerage 1.5% on 15-11-1999. Show Cost of investment sold, carrying amount of unsold investments and profit on sale of investments.(RC-84)
Q16.Dr. Shinde furnishes you with following information and asks you to show:
a.The relevant investment account for the calendar years 1997 and 1998 and
b.The detailed cost of his various holding as on 31st December, 1998.
Information:
i.On 1st January, 1997, he had 500 equity shares of Rs. 100 each of P. Ltd. These Shares had cost Rs. 60,000.
ii.On 1st March, 1997, P Ltd. made a right issue of shares in the ratio of 1 share for every 2 shares held. The issue was at a price of Rs. 125 per share payable in full on application.
Dr. Shinde not only took up his entitlements but also purchased rights for further 200 shares at Rs. 40 per share and applied for additional 100 shares.
iii.On 1st May, 1997 he received refund order from P. Ltd. in respect of 50 shares.
Iv.On 1st September, 1997 he sold 400 shares at Rs. 250 each.
v.On 1st February, 1998 the company made a bonus issue in the ratio of one share for every three shares held.
vi.On 1st June, 1998 he purchased 300 share of P Ltd. at Rs. 190 each
vii.On 1st November, 1998 he sold 100 shares at Rs. 220 each. You are instructed to Prepare Investment A/c as per AS-3. (VC-15)
Q17.On 1.4.96, Sundar had 25,000 equity shares of ‘X’ Ltd. at a book value of Rs.5 per share (face value Rs.10). On 20.6.96, he purchased another 5,000 shares of the company at Rs.16 per share. The directors of ‘X’ Ltd. announced a bonus and right issue. No dividend was 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 for payment 30.9.96.
Shareholders can transfer their rights in full or in part. Accordingly Sundar sold 331/3% of his entitlement to Sekhar for a consideration of Rs.2 per share.
Dividends: Dividends for the year ended 31.3.96 at the rate of 20% were declared by X Ltd. and received by Sundar on 31.10.096. Dividends for shares acquired by him on 20.6.96 are to be adjusted against the cost of purchase.
On 15.11.96, Sundar sold 25,000 equity shares at a premium of Rs.5 per share.
You are required to prepare in the books of Sundar:
(1)Investment Account.
(2)Profit & Loss Account.
For your exercise, assume that the books are closed on 31.12.96 and 1shares are valued at average cost. (S Gr. II- I-28)
Q18.The following transactions of investor Ltd. took place during the year ended 31st March, 1998:
1997
1st AprilPurchased Rs. 12,00,000 8% bonds at Rs.80.5 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 MayReceived half years interest on 8% bonds.
15th MayX Ltd. made a bonus issue of three equity shares for every two held. Investor Ltd. sold 1,25,000 bonus shares for Rs. 20 each.
1st JulyPurchased 50,000 equity shares of Rs. 10 each in C Ltd. at Rs. 7.75 each.
2nd OctoberSold Rs.3,00,000 8% bonds at Rs.81 ex-interest.
1st November Received half year’s bond interest
1st December Received 18% dividend n equity shares in X Ltd.
1998
1st Jan.C Ltd. made a right 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 MarchReceived 12.5% dividend on equity shares in C Ltd.
Prepare the relevant investment accounts in the books of Investor Ltd. for the year ended 31st March, 1998. (ICWA FINAL-II I-84)
Q19On 1st April, 2006 Mr. Mayur had 30,000/-Equity shares in Jai Ltd. at a book-value of Rs.4,50,000/- (face value Rs.10/- per share). On 22nd June 2006, he purchased another 5000 shares of the company for Rs.80,000.
The Directors of Jai Ltd. announced a bonus issue of equity shares in the ratio of one share for seven shares held on 16th August 2006.
On 31st August, 2006 the Company made a right issue in the ratio of three shares for Eight shares held on payment of Rs.15/- per share. Due Date for the payment was 30th September, 2006. Mr. Mayur subscribed to 2/3rd of the right shares and sold remaining of his entitlement to Vinayak for a consideration of Rs. 2 per share.
On 31st October, 2006 received dividends from Jai Ltd. @ 20% for the year ended 31st March, 2006. Dividend for share acquired by him on 22nd June, 2006 are to be adjusted against the cost of purchase.
On 15th November, 2006 Mayur sold 30,000 Equity shares at a premium of Rs.5/- per share. You are required to prepare Investments account in the book Mr.Mayur. Assume that the books of accounts are closed on 31st March, 2007 and shares valued at weighted average cost. (A-08)
Q20.On 1-4-2006 Mr. Abhishek had 10,000 equity shares (of Rs.10 each) in Rai Entertainment Ltd. at the cost of Rs.1,60,000
On 1-7-2006 he acquired 4,000 more shares in the same Company for Rs.80,000.