Module 4 investment accounts

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1. MODULE 4 Mahesh m t asst. professor of commerce knm govt. arts and science college, kanjiramkulam INVESTMENT ACCOUNTS

2. Investment Accounts An investment account is a separate account maintained for each scrip in the investment ledger of investing company showing different transactions in the scrip separately. It also records interest received . Interest accrued etc. for each scrip. When the number of investments carried is large, a separate ledger is prepared for recording all investment transactions.

3. Journal entries- purchase or sale on the date of payment of interest 1. When investment is purchased at interest date Investment a/c Dr. xxxx To, Bank a/c xxxx ( Quoted price X no. of investments + Brokerage) 2. When interest/ dividend is received after purchase Bank a/c Dr. xxxx To, interest /Dividend a/c xxxx

4. Journal entries- Investment Accounts 3. When investment is sold at interest date Bank a/c Dr. xxxx To, Investment a/c xxxx ( Quoted price X no. of investments - Brokerage) 4. For transfer of interest / dividend to the profit and loss account at the end of the year. I nterest /Dividend a/c Dr. xxxx To, Profit and Loss a/c xxxx

5. Journal entries- Investment Accounts 5. At the end of the year, the balance of investment is to be valued at ‘cost’ or ‘market price’ which ever is lower. This value will be carried forward to the next period 6. The balance of investment account represents the profit of loss on sale of investment , a) if it shows a credit balance, it will be ‘profit’. Entry will be Investment a/c Dr. x xxx To, Profit and loss a/c xxxx b) if it shows a debit balance, it will be ‘loss’. Entry will be Profit and loss a/c Dr. xxxx To, Investment a/c xxxx

6. Format of investment ledger ----% debenture/bond/share accoun t Date Particulars Nominal value Int./ Div Principal value Date Particulars Nominal value Int./ Div Principal value 1.1/20 To, B ank 10000 xxx 9500 9500 31.12 Bal P&l (loss) 10000 xxxx 9000 500 9500

7. On 1 st J anuary 2016 C hand Ltd. Purchased 1,000 12% debentures of Tata Ltd. of Rs.100 each @Rs.95. On 1 st July 2016, 600 debentures were sold at Rs.98 each. Debenture interest payable half yearly on 30 th June and 31 st December. Prepare the account of 12% Debentures in Tata Ltd. In the books of Chand Ltd. Assuming the accounting year ends on 31 st December. Market price of debentures on 31 st December is 2015 12% Tata Debenture account (int. payable on 30 th june &31 dec ) Date Particulars Nominal value Int./ Div Principal value Date Particulars Nominal value Int./ Div Principal value 1.1.16 1.7.16 To , Bank To, p&l To, P&L 100,000 8,400 95,000 1,800 30.6.16 1.7.16 31.12.16 By, bank By , bank By , bank By, Balan c/d 60,000 40000 6,000 2,400 Xxx 58,800 38,000 100,000 8,400 96,800 100000 8,400 96,800 Interest for 6 months = 100,000 X 12/100 X 6/12 = 6,000 Sale of 600 debenture @98 each = 600 X 98 =58,800 Interest fro 6 months = 40000 X 12/100 X6/12 = 2400 PROFIT/LOSS ON SALE = sale –cost = (600X98)-(600X95) 0r 3x600=1800 5. balance 400 x95 =38,000

8. On 1 st J anuary 2015 NASDAQ Ltd. Purchased 1,000 15% debentures of HDFC Ltd. of Rs.100 each @Rs.96. On 1 st July 2015, 5 00 debentures were sold at Rs.99 each. Debenture interest payable half yearly on 30 th June and 31 st December. Prepare the account of 15% Debentures in NASDAQA Ltd. . Assuming the accounting year ends on 31 st December. Market price of debentures on 31 st December is Rs.98 15% debentures account Date Particulars Nominal value Int./ Div Principal value Date Particulars Nominal value Int./ Div Principal value 1.1.15 31.12.15 To , Bank To, P&L 100000 11250 96000 1500 30.6.15 1.7.15 31.12.15 By, bank By , bank By , bank By, Balan c/d 50000 50000 7500 3750 49,500 48000 100000 11250 97500 100000 11250 97500

9. purchase or sale before the date of payment of interest When investments are purchased or sold before the due date of interest , it is necessary to identify whether quotation price includes the interest up to the date of purchase or not. Date of interest 30 th June and 31 st December 2020 Date of purchase 1st April 2020 ( so it is necessary to check the price includes interest from 1 st J anuary to 31 st march 2020 or not) If it includes interest, we refer cum interest –cumulative interest If price does not include interest- it will be referred as Ex-interest/Exclusive of interest In case of ex-interest ,interest has to be calculated separately.

10. Cum dividend/ cum interest quotations Cum dividend/ cum interest quotations is one which the quoted price includes the accrued dividend or interest from the last interest or dividend date to the date of transaction. It means that the quotation is cumulative or inclusive of accrued interest or dividend as the case may be. The quotation ,cum –interest , includes cost and interest accrued up to the date of purchase. When interest becomes due, it would be the right of the buyer to claim that.

11. Cum dividend/ cum interest purchases calculation of interest accrued Calculate the period from that last date of interest to the date of purchase. Calculate the interest accrued Accrued interest = Rate of interest X period x face value 12 (Months)/365(Days) 3. Calculate Cost Cost = (quotation price x No. of securities purchased) – accrued interest

12. Journal entries- purchase before the date of payment of interest 1. When investment is purchased at cum-interest Investment a/c Dr. xxxx (cost) interest a/c Dr. Xxxx ( accrues int.) To, Bank a/c xxxx (QP) 2. When interest/ dividend is received on the due date after purchase Bank a/c Dr. xxxx To, interest /Dividend a/c xxxx (total amount of interest for that period) Interest= Nominal Value of investment X ROI/100 X Period/12

13. On 31 st March 2015, Capital finance Ltd. Purchased 2,000 6% government stock of the face value of Rs.100 each @Rs.95 cum interest. Half yearly interest payable on 30 th June and 31 st December every year. Prepare investment ledger of Capital finance Ltd. For its financial year ended 31 st December 2015, 6% Government stocks account Date Particulars Nominal value Int./ Div Principal value Date Particulars Nominal value Int./ Div Principal value 1/3/15 31/12/15 To,Bank To, P& L 2,00,000 3,000 9,000 1,87,000 30.6.15 31.12.15 By, bank By, Bank Balan c/d -- --- 2,00,000 6,000 6,000 --- --- 1,87,000 2,00,000 12,000 1,87,000 2,00,000 12,000 1,87,000

14. Ex- dividend/ Ex- interest quotations Ex- dividend/ ex- interest quotations is one which the quoted price does not include the accrued dividend or interest from the last interest or dividend date to the date of transaction. It means that the quotation is exclusive of accrued interest or dividend as the case may be. The quotation ,ex –interest only covers the cost of investments and buyer is liable to pay additional amount as interest accrued up to the date of purchase.

15. Ex- dividend/ Ex- interest quotations Interest on fixed interest bearing security accrues on specific due dates and the holder of the security is entitled to get whole amount of interest that accrues on the date irrespective of his period of holding. Important points to remember in this regard:- In respect of government securities and debentures, the price quotes id ex-interest unless otherwise stated. In respect of non-government securities and debentures, it is cum-interest unless otherwise stated .

16. Ex- dividend/ Ex- interest quotations Accounting treatment When securities are purchased “ex-interest’, the quotation price does not contain any accrued interest. The seller will get quotation price + accrued interest. I nvestment account is debited (principal value column) with quotation price + brokerage if any. Accrued interest has to be calculated seperately and debited to investment account ( int / div. column) Bank account is credited with quotation price + brokerage (if any) + accrued interest. On receipt of interest on due dates, interest accou n t will be credited with whole amount.

17. Journal entries- purchase before the date of payment of interest 1. When investment is purchased at Ex-interest Investment a/c Dr. xxxx (quotation price) interest a/c Dr. x xxx ( accrues int.) To, Bank a/c xxxx (QP + accrued interest) 2. When first interest/ dividend is received on due date after purchase Bank a/c Dr. xxxx To, interest /Dividend a/c xxxx (total amount of interest for that period) Interest= Nominal Value of investment X ROI/100 X Period/12

18. On 1 st March 2016, Jaya finance Ltd. Purchased 3,000 12% Govt. bonds of Rs.100 each @Rs.96 ex- interest. Half yearly interest payable on 30 th June and 31 st December every year. Prepare investment ledger of Jaya finance Ltd. For its financial year ended 31 st December 2016, also give journal entries in the books of jaya financeLtd . 12% government bonds account Date Particulars Nominal value Int./ Div Principal value Date Particulars Nominal value Int./ Div Principal value 1.3.16 31.12.16 To,Bank To, P& L 3,00,000 6,000 30,000 2,88,000 30.6.16 31.12.16 By, bank By, Bank By, Bal. c/d --- --- 3,00,000 18,000 18,000 2,88,000 3,00,000 36,000 2,88,000 3,00,000 36,000 2,88,000 Amount payable = 3,000 x96=288000 , Period= 2/12 Interest for 2 months = face value(3,00,000 x 12/100 x 2/12= 6,000 Cost = qp 2,88,000 – 6,000 = 2,82,000 Interest on 30.6.16 and 31.12 2016 = 3,00,000 x 12/100 x 6/12 =18,000

19. Cum –interest/ cum-dividend sales When securities are sold “cum-interest” , the sale proceeds consists of accrued interest also. Interest account will be credited with the accrued interest and investment account will be credited with the balance amount ie , quotation price x no. of investment – accrued interest Bank account will be debited with quotation price

20. Journal entries- sale before the date of payment of interest 1. When investment is sold at cum-interest Bank a/c xxxx ( QP) To, Investment a/c xxxx (QP- Interest) T o, I nterest a/c xxxx ( accrues int.) 2. At the end of the year, profit/loss on sale of investment is transferred to profit and loss account If there is profit on sale of investment Investment a/c Dr. xxxx To, Profit and Loss a/c xxxx if there is loss on sale of investment profit and loss a/c Dr. xxxx To, Investment a/c xxxx .

21. Journal entries- sale before the date of payment of interest 1000 ,10% debentures of rs.100 each sold at 96 cum-interest 0n 31.3.2021/ last date 31.12.2020 1. When investment is sold at cum-interest Bank a/c xxxx ( QP) 1000x96=96000 To, Investment a/c xxxx (QP- Interest)(96000-2500) 93500 T o, I nterest a/c xxxx ( accrues int.)(100000x10/100x3/12) 2500 2. At the end of the year, profit/loss on sale of investment is transferred to profit and loss account If there is profit on sale of investment Investment a/c Dr. xxxx To, Profit and Loss a/c xxxx if there is loss on sale of investment profit and loss a/c Dr. xxxx To, Investment a/c xxxx .

22. On 1 st April 2013, Janatha Ltd. has Rs . 3,00,000, 6% govt. stock at Rs.94 each (FV 100) Half yearly interest payable on 31 ST March and 3oth September every year.The company sold Rs.90,000 of the stock of RS.95 cum-interest on 1 st June 2013. draw up 6% Govt. stock account in the Investment ledger of the company for the year ended 31 st March 2014. Ignore brokerage and income tax. The stock was quoted at Rs.96 ex-interest at the stock exchange on that date 12% government bonds account Date Particulars Nominal value Int./ Div Principal value Date Particulars Nominal value Int./ Div Principal value 2013 ¼ 31.3.14 To, bal To, p&l 3,00,000 13,500 2,82,000 1/6/13 30.9.13 31.3.14 By, Bank By, bank By.bank By, bal c/d 90,000 2,10,000 900 6,300 6,300 84,600 1,97,400 3,00,000 13500 2,82,000 3,00,000 13,500 2,82,000 No. of stock = 3,00,000/100=3,000, 2) 94x3,000 = 2,82,000 quotation price= 95x900=85,500 accrued interest for 2 months= 90,000 x 6/100 x 2/12 =900 Actual sale value = total price- interest ( 85,500-900)= 84,600 Interest 0n 30.9.13for ( 3000-900)2100 govt stock= 210000x6/100x6/12= 6,300 Value of investment on 31.3.2104 @94 each = 94x2100=197400

23. Ex –interest/ Ex-dividend sales When securities are sold “Ex-interest” , the sale proceeds does not include accrued interest. Investment account will be credited with the quotation price and interest account will be credited with accrued interest. Bank account will be debited with quotation price plus accrued interest upto the date of sale .

24. Journal entries- sale before the date of payment of interest 1. When investment is sold at ex-interest Bank a/c xxxx ( QP+ accured interest) To, Investment a/c xxxx (QP) T o, I nterest a/c xxxx ( accrues int.) 2. At the end of the year, profit/loss on sale of investment is transferred to profit and loss account If there is profit on sale of investment Investment a/c Dr. xxxx To, Profit and Loss a/c xxxx if theres is loss on sale of investment profit and loss a/c Dr. xxxx To, Investment a/c xxxx .

25. On 1 st April 2013, Janatha Ltd. has Rs . 3,00,000, 6% govt. stock at Rs.94 each (FV 100) Half yearly interest payable on 31 ST March and 3oth September every year.The company sold Rs.90,000 of the stock of RS.95 ex-interest on 1 st June 2013. draw up 6% Govt. stock account in the Investment ledger of the company for the year ended 31 st March 2014. Ignore brokerage and income tax. The stock was quoted at Rs.96 ex-interest at the stock exchange on that date 12% government bonds account Date Particulars Nominal value Int./ Div Principal value Date Particulars Nominal value Int./ Div Principal value 2013 ¼ 31.3.14 To, bal To, p&l 3,00,000 13,500 2,82,000 900 1/6/13 30.9.13 31.3.14 By, Bank By, bank By.bank By, bal c/d 90,000 210000 900 6,300 6,300 85,500 197400 300000 13,500 2,82,900 3,00,000 13,500 2,82,900 No. of stock = 3,00,000/100=3,000, 2) 94x3,000 = 2,82,000 sale quotation price= 95x900=85,500, accrued interest for 2 months= 90,000 x 6/100 x 2/12 =900 Actual sale value = total price- interest ( 85,500-900)= 84,600 Interest 0n 30.9.13for ( 3000-900)2100 govt stock= 210000x6/100x6/12= 6,300 Value of investment on 31.3.2104 @94 each = 94x2100=197400

26. J Ltd. Hold 400, 12% debentures of RS.100 each in A Ltd. As on 1 st April 2015 at a cost of Rs.50,000. interest payable on 30 th June and 31 st December. On 1 st June 2015, 200 debentures are purchased cum-interest at Rs.21,400. on 1 st November 2015,300 debentures are sold ex-interest at Rs.28,650. On 30 th November 2015, 200 debentures are purchased ex-interest for Rs.19,200. On 31 st December 2015, 300 Debentures are sold cum-interest for Rs.32,250. prepare investment account, by applying FIFO method and debentures were quoted at par on 31 st March 2016. 12% Debentures in A Ltd. Date Particulars Nominal value Int./ Div Principal value Date Particulars Nominal value Int./ Div Principal value 1.4.15 1.6.15 30.11. 15 31.3.16 To, bal b/d To, Bank TO, Bank To, p&l 40,000 20000 20000 1200 1000 1000 5200 50,000 20,400 19,200 30.6.15 1.11.15 31.12.1 5 31.3.16 By. Bank By, Bank By. P& L By, bank By, p&l By, bank By, bal c/d 30000 30,000 20,000 3,600 1,200 1,800 1,200 600 28,650 8850 30450 2450 19,200 80000 8400 89600 80000 8400 89600

27. Working note-Illustration 6 FIFO= FIRST IN FIRST OUT Interest accrued on 1.4.15 = 40,000 x12/100x 3/12 =1200 Calculate Interest included in purchase price of Rs.21400 Interest= 20000 x12/100x 5/12=1,000 Purchase price excluding interest=21,400-1000=20,400 Interest due on 30.6.15= 60,000 x 12/100x6/12= 3,600 Interest on 1.11.15= 30000 x12/100x 4/12 = 1200 Profit/loss =sale price-cost= 28,650-37,500=-8850 Cost of 300 debentures = 50000/400 x300=37,500 Interest(purchase) 30.11.2015= 20000 x12/100 x5/12 =1000 Interest (sale)=30000 x12/100x6/12 =1800 Value of sale =32,250-1800= 30450 c

28. Working note-Illustration 6 Cost of investment sold on 31.12.2015 Value/cost of first 100 debentures =50,000/400 x100 =12,500 Cost of next 200 debentures =20,400 cost of 300 debentures sold on 31.12.2015 = 12,500+20,400=32,900 Profit/loss on sale = sale price –cost price = 30,450-32900= -2450 Interest due on 31.12.15 =20,000x12/100x6/12= 1200 Accrued interest on 31.3.2016 = 20,000 x 12 /100 x 3/12 = 600

29. Mr.invester gives the following data of his holding in 16% Debentures of Rs.100 each of Y Ltd. Held as current assets. Books closes on every 31 st December. Interest on 30 th September and 31 st march. 1.1.15 opening balance – Face value Rs.60,000, cost Rs.59,000 1.3.15 100 debentures purchased ex-interest at Rs.98 1.7.15 sold 200 debentures ex-interest at Rs.100 1.10.15 Purchased 50 Debentures at Rs.98 cum-interest 1.11.15 sold 200 debentures ex-interest at Rs.99 brokerage of 1% is to be paid on every transaction . MV was Rs.99 prepare investment account by applying FIFO Method Date Particulars Nominal value Int./ Div Principal value Date Particulars Nominal value Int./ Div Principal value 1.1.15 1.3.15 To, bal b/d To, bank 60000 10000 2400 59000 9898

30. Working note-Illustration 7 Interest = 60,000 x 16/100 x3/12 =2400 Purchase price = 100 x 98=9800 + 1% 0f 9800 = 9800 + 98= 9898

31. Bonus shares “Shares issued to the existing shareholders out of accumulated profits in the proportion of shares held by them without receipt of anything as consideration from them is called bonus issue/shares” Company may pay bonus either in cash or in kind. Bonus paid in cash may affect the company’s working capital position as it creates cash outflow. In order to avoid outflow of cash and at the same time to satisfy the shareholders , the company may issue bonus shares. Bonus may either be by making partly paid up shares fully paid or by issuing fully paid shares .

32. Bonus shares – A ccounting treatment 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 is reduced.

33. on April 1,2013, Mr. Subramanium has 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, 2013 Mr.Subramanium purchased 5,000 Equity shares in X Ltd.at Rs.14 each. On June 30,2013, the Directors of X Ltd. Announced a bonus issue. Bonus was declared at the rate of one Equity share for every five shares held and these shares were received on August 2,2013 Show investment account up to August 2,2013. In the books of Mr. Subramanium- investment in equity shares of X ltd a/c Date Particulars Nominal value Int./ Div Principal value Date Particulars Nominal value Int./ Div Principal value 1.4.13 1.6.13 2.8.13 To, Bal b/d To, Bank To, Bonus 2,00,000 50,000 50,000 3,20,000 70,000 -------- calculation for number of bonus shares receivable for Mr. Subramanium No. of bonus shares = total no. of shares held by Mr. Subramaniumx1/5 25000x1/5 =5,000

34. Right shares /Right Issue- sec. 62 Companies Act, 2013 “The issue of shares by an existing company to the existing shareholders on right basis in proportion to their present holdings is known as Right shares/Issue.” When company decides to increase its subscribed capital by issue of additional shares , at any time after the expiry of two years of its formation or one year after the first allotment of shares, whichever is earlier, such shares must first be offered to existing equity shareholders of the company in proportion to the capital paid up on those shares. The shares so offered are known as ‘RIGHT SHARES.

35. Right shares /Right Issue- ACCOUNTING TREATMENT Right issue is an invitation to the existing shareholders to buy new shares in proportion to their existing shareholding. Issue of Right shares is a pre-emptive right to buy new shares at a price which is lesser than the market price. Such shares may be purchased by the shareholder or the right may be renunciated in favour of a third party for a consideration. If shares are purchased, the number of shares and amount paid will be entered in the nominal value column and principal value column respectively. If such shares are sold, only the amount received will be entered in the principal column.

36. on April 1,2013, Mr. Subramanium has 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, 2013 Mr.Subramanium purchased 5,000 Equity shares in X Ltd.at Rs.14 each. On June 30,2013, the Directors of X Ltd. Announced a RIGHT issue. right was declared at the rate of one Equity share for every five shares held and these shares were received on August 2,2013. amount payable is 12 per share. He had taken half of his entitlement and balance renunciated for rs.2 each Show investment account up to August 2,2013. In the books of Mr. Subramanium- investment in equity shares of X ltd a/c Date Particulars Nominal value Int./ Div Principal value Date Particulars Nominal value Int./ Div Principal value 1.4.13 1.6.13 2.8.13 To, Bal b/d To, Bank To, Bank 2,00,000 50,000 25,000 3,20,000 70,000 30,000 -------- 1.8.13 bank 5000 calculation for number of right shares receivable for Mr. Subramanium No. of right shares = total no. of shares held by Mr. Subramaniumx1/5 25000x1/5 =5,000 No. of right shares taken by subramanium = 5,000 x1/2=2500 Amount payable =2500x12= 30,000 Amount received against renunciated shares= 2500 x 2=5000

37. Illustration 9 Rajaram carried out the following transactions in the shares of Bright Ltd. On 1 st April,2015 he purchased 20,000 equity shares of Rs.1 each fully paid up for Rs.30,000. On 15 th May,2015 Rajaram sold 4,000 shares for Rs.7,600. At a meeting on 15 th June 2015, the company decided. i) to make a bonus issue of one fully paid share for every four bonus shares held on 1 st June 2015, and ii) t o give its members the right to apply for one share for every five shares held on 1 st June 2015 at a price of Rs.1.50 per share of which 75 paise is payable on or before 15 th July,2015 and the balance 75 paise per share on or before 15 th September 2015 The shares issued under (i) and (ii) were not to rank for dividend for the year ending 31 st December 2015

38. Illustration 9 d) Rajaram received his bonus shares and took up 2,000 shares under the right issue, paying the sums thereon when due and selling the rights to the remaining shares at 40 paise per share , the proceeds were received on 3oth September 2015 e) on 15 th March 2016, he received a dividend from Bright Ltd. Of 15 per cent in respect of the year ended 31 st December 2015 f) On 3oth march , he received Rs.14,000 for sale of 10,000 shares. you are required to record these transactions in the investment Account in Rajaram’s books for the year ended 31 st March 2016, transferring any profits or losses on these transactions.

39. Date Particulars Nominal value Int./ Div Principal value Date Particulars Nominal value Int./ Div Principal value 1.4.15 15.5.15 15.6.15 15.7.15 30.9.15 30.3.16 31.3.16 To, bank To, p& l a/c To, bonus To, bank To, bank To, p&l a/c To, p& l a.c 20,000 4000 2000 -- 2400 30,000 1600 --------- 1500 1500 1945 15.5.15 30.9.15 15.3.16 30.3.16 31.3.16 By, Bank By, Bank By, bank By, bank By, bal c/d 4000 10,000 12,000 2400 7600 480 14,000 14465 26,000 2400 36,545 26,000 2400 36,545 In the books of Rajaram investment account (shares in Bright Ltd.)

40. Thank you Assignment /Homework All practical problems ON MODULE 4 INVESTMENT ACCOUNTS to be completed and upload the same to G oogle classroom on or before 7.9.2021

41. Working note –illustration 9 Cost of an equity share =30000/20000 x 4000 =6,000 Profit/loss on sale = sale price-cost= 7600-6000=1600 No. of bonus shares to be issued =16000x1/4=4,000 No. of right shares receivable= 16,000 x1/5= 3200 Amount payable for 2000 right shares (15.7.15) =2000 x .75=1500 Amount payable for right shares on 30.9.15= 2000x.75= 1500 Amount received against shares under renunciation= 1200 x .40 =480 Dividend for the period ending 31.12.2015= 16,000x15/100=2400 Cost of 22,000 shares = 30,000/20000x16000=24,000+3000-480= 26,520 Cost of 10,000 shares = 26,520/22,000 x10,000= 12055 Profit /loss on sale = sale value –cost= 14,000 – 12055 = 1945 Value of investment on 31.3.1`6 of 12000 shares = 26,520/22,000 x 12000 =14465