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CHAPTER, , 9, , INVESTMENT ACCOUNTS, LEARNING OUTCOMES, After studying this unit, you will be able to–, , , Understand the meaning of the term ‘investments’, , , , Compute the cost of investments, , , , Learn the classification of investments, , , , Compute the carrying amount of investments, , , , Calculate the profit/ loss on disposal of investments, , , , Determine the, investments, , transfer, , value, , © The Institute of Chartered Accountants of India, , on, , reclassification, , of

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9.2, , ACCOUNTING, , Investments, , Classification, , Current, investments, , Long-term, investments, , Initial recognition, , Cost, , Cost, , Subsequent, recognition, , Lower of cost and, fair value, , Cost less provision, for 'other than, temporary', diminution, , © The Institute of Chartered Accountants of India

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INVESTMENT ACCOUNTS, , 9.3, , 1. INTRODUCTION, Investments are assets held by an enterprise for earning income by way of, dividends, interest and rentals, for capital appreciation, or for other benefits to, the investing enterprise. Investment Accounting is done as per AS 13, Accounting, for Investments which deals with accounting for investments in the financial, statements and related disclosure requirements except:, (i), , Bases for recognition of interest, dividends and rentals earned on, investments, , (ii), , operating or financial leases, , (iii), , investment of retirement benefit plans and life insurance enterprises, , (iv), , mutual funds, etc., Note: Assets held as Stock-in-trade are not ‘Investments’., , 2. CLASSIFICATION OF INVESTMENTS, The investments are classified into two categories as per AS 13, viz., Current, Investments and Long-term Investments., , 2.1 Current Investments, •, , A current Investment is an investment that is by its nature readily realisable, and is intended to be held for not more than one year from the date on, which such investment is made., Example: A Ltd. acquired 1,000 shares of B Ltd. on 1st April, 20X2 with an, intention to hold them for a period of 15 months. Suggest the classification of, such investment (in accordance with AS 13) as on 31st March, 20X3., Investment in 1,000 shares is not a current investment because it is intended, to be held for more than one year from the investment date even though, the remaining period as on the reporting date may be less than one year., , •, , The carrying amount for current investments is the lower of cost and fair, value., , •, , Fair Value is the amount for which an asset could be exchanged between a, knowledgeable, willing buyer and a knowledgeable, willing seller in an arm’s, length transaction. Under appropriate circumstances, market value or net, realisable value provides an evidence of fair value., , © The Institute of Chartered Accountants of India

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9.4, , ACCOUNTING, , •, , Market Value is the amount obtainable from the sale of an investment in, an open market, net of expenses necessarily to be incurred on or before, disposal., , •, , Any reduction to fair value and any reversals of such reductions are, included in the statement of profit and loss., , 2.2 Long-term Investments, •, , A long-term investment is an investment other than a current investment., , •, , Long term investments are usually carried at cost., , •, , If there is a decline, other than temporary, in the value of a long term, investment; the carrying amount is reduced to recognise the decline., , •, , The reduction in carrying amount is charged to the statement of profit and, loss., , •, , 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., , 3. COST OF INVESTMENTS, 1., , The cost of an investment includes acquisition charges such as brokerage,, fees and duties., , 2., , If an investment is acquired, or partly acquired, by the issue of shares or, other securities, the acquisition cost is the fair value of the securities issued., The fair value may not necessarily be equal to the nominal or par value of, the securities issued., If an investment is acquired in exchange, or part exchange, for another, asset, the acquisition cost of the investment is determined by reference to, the fair value of the asset given up or the fair value of the investment, acquired, whichever is more clearly evident., Type of acquisition, , Cash/ bank, , Issue of shares/ other securities, In exchange for another asset, , Cost of investments, , Cash price including charges such as, brokerages, fees and duties, Fair value of securities issued, Fair value of asset given up or fair value, of investment acquired, whichever is, more clearly evident, , © The Institute of Chartered Accountants of India

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9.5, , INVESTMENT ACCOUNTS, 3., , A separate Investment Account should be made for each scrip purchased., The scrips purchased may be broadly divided into two categories, viz., Categories of Investment on the, basis of Income, , Fixed income bearing scrips, , Variable income bearing scrips., , e.g. Government securities;, debentures or bonds, , e.g. Equity shares, , The entries in Investment Account for these two broad categories of scrips, will be made as under:, (i), , Fixed income Bearing Securities: These refer to securities having, fixed return of income. Investment in Government securities or, debentures comes under this category., Transaction for fixed income bearing securities may occur on, following basis:, (a), , Ex-interest basis, , (b), , Cum- interest basis, , In case the transaction is on ‘Ex-interest’ basis, the amount of, interest accrued to the date of transaction has to be paid in, addition to the price of security., The following entries are made in the books of Purchaser:, Investment Account, Interest accrued Account, To Bank A/c, , Dr. (With the price settled on exinterest basis)*, Dr. (Accrued interest till the date of, transaction)**, (With total amount paid), , * This amount will appear in Capital Column of ‘Investment A/c’., **This amount will appear in Income Column of ‘Investment A/c’., © The Institute of Chartered Accountants of India

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9.6, , ACCOUNTING, , In case the transaction is on cum-interest basis, a part of purchase, price is related to the interest accrued from the date of the last, interest paid to the date of transaction. Hence, in this case, the cost, of investment has to be calculated by subtracting the amount of, accrued interest from the Purchase Price., The following entries are made in the books of Purchaser:, Investment Account, , Dr., , Interest accrued Account, To Bank A/c, , Dr., , (With the price settled on cuminterest less Interest Accrued)*, (Accrued interest till the date of, transaction)**, (With total amount paid), , * This amount will appear in Capital Column of ‘Investment A/c’., **This amount will appear in Income Column of ‘Investment A/c’., When the interest amount is actually received, it is entered in the, Income Column credit side. The net effect of these entries will be that, the amount credited to the income will be only the interest arising, between the date of purchase and the one on which it next falls due., Note:, , (ii), , (a), , Interest amount is always calculated with respect to nominal, value (par value/ nominal value)., , (b), , In case the quotation does not specify whether it is ex-interest, or cum-interest, the same will be treated as ex-interest, quotation as per the general practice, , Variable Income Bearing Securities: These refer to securities having, variable return of income. Investment in equity shares comes under, this category. The following points should be noted with respect to, investment in equity shares:, (a), , dividends from investments in shares are not recognised in the, statement of profit and loss until a right to receive payment is, established;, , (b), , the amount of dividend accruing between the date of last, dividend payment and the date of purchase cannot be, immediately ascertained., , © The Institute of Chartered Accountants of India

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INVESTMENT ACCOUNTS, , 9.7, , In the following way the information is incorporated in the books of investor, at the time of purchase:, Investment Account, , To Bank A/c, , Dr., , (With the entire purchase price)*, (With total amount paid), , * This amount will appear in Capital Column of ‘Investment A/c’., The adjustment with respect to dividend is made when the dividend is, actually received as under:, Bank A/c, , Dr., , To Investment A/c, To Investment A/c, , (with total dividend received), (with the amount of dividend for the, period for which the investor did not, hold the share)*, (with the amount of dividend for the, post – acquisition period)**, , *This amount will appear in Capital Column of ‘Investment A/c’., **This amount will appear in Income Column of ‘Investment A/c’., •, , The important point with respect to investment in equity shares is that, the amount of dividends for the period, for which the shares were not, held by the investor, should not be treated as revenue receipt but they, should be treated as capital receipt, i.e., when dividends on equity, shares are declared from pre-acquisition profits, the amount of such, dividend received by the investor is entered on the credit side in the, capital column, so as to reduce the acquisition cost., , •, , If it is difficult to make an allocation between pre and post-acquisition, periods except on an arbitrary basis, the cost of investment is normally, reduced by dividends receivable, only if they clearly represent, recovery of part of the cost., , 4., , When right shares offered are subscribed for, the cost of the right, 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 statement of profit and loss., , © The Institute of Chartered Accountants of India

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9.8, , Right shares, , ACCOUNTING, , Accounting, , When right shares offered are Cost of right shares should be, subscribed, added to carrying amount of the, original holding., If rights are not subscribed for Sale proceeds should be taken to, but are sold, statement of profit and loss (refer, note below for an exception)., Note: Where the investments are acquired on cum-right basis and the, market value of investments immediately after their becoming ex-right is, lower than the cost for which they were acquired, it may be appropriate to, apply the sale proceeds of rights to reduce the carrying amount of such, investments to the market value., For e.g., Mr. X acquires 200 shares of a company on cum-right basis for, ` 50,000. He subsequently receives an offer of right to acquire fresh shares, in the company in the proportion of 1:1 at ` 110 each. X subscribes for the, right issue. Thus, the total cost of X’s holding of 400 shares would amount, to ` 72,000 (50,000 + 22,000)., Suppose, he does not subscribe but sells the rights for ` 15,000. The exright market value of 200 shares bought by X immediately after the rights, falls to ` 40,000. In this case out of sale proceeds of ` 15,000, ` 10,000 may, be applied to reduce the carrying amount to the market value `40,000 and, ` 5,000 would be credited to the profit and loss account., 5., , Where an investment is acquired by way of issue of bonus shares, no, amount is entered in the capital column of investment account since the, investor has not paid anything., , 4. DISPOSAL OF INVESTMENTS, •, , On disposal of an investment, the difference between the carrying amount, and the disposal proceeds, net of expenses is recognised in the profit and, loss statement., , •, , When a part of the holding of an individual investment is disposed, the, carrying amount is required to be allocated to that part on the basis of the, average carrying amount of the total holding of the investment., , •, , In respect of shares, debentures and other securities held as stock-in-trade,, , © The Institute of Chartered Accountants of India

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INVESTMENT ACCOUNTS, , 9.9, , the cost of stocks disposed of may be determined by applying an, appropriate cost formula (e.g., first-in, first-out (FIFO), average cost, etc.)., These cost formulae are the same as those specified in AS 2, Valuation of, Inventories., (i), , Fixed Income Bearing Securities: In case the transaction is on ‘Cuminterest basis’, the amount of accrued interest from the date of last payment, to the date of sale is credited in the income column and only the sale, proceeds, net of accrued interest (from the date of last payment to the date, of sale), is credited in the capital column of investment account., In case the transaction is on ‘Ex-interest’ basis, entire sale proceeds is, credited in the capital column and the amount of accrued interest from the, date of last payment to the date of sale, separately received from the buyer, will be taken to the credit side of the income column of investment account., , (ii), , Variable Income Bearing Securities: In case of these securities, the entire, amount of sale proceeds should be credited in the capital column of, investment account, unless the amount of accrued dividend can be, specifically established., The entries in the books at the time of sale of investments will be just the, reverse of the entries passed for their acquisition., Particulars, , Value in ‘capital’ column of investment, Purchase, , Sale, , Transaction on Purchase, price, of, ex-interest basis investment,, i.e.,, no, impact, of, interest, accrued upto the date of, transaction, , Entire sale proceeds from, investments, i.e., no impact, of accrued interest (from, the date of last payment to, the date of sale), , Transaction on Purchase, price, of, cum-interest, investment less accrued, basis, interest upto the date of, transaction, , Sale proceeds, net of, accrued interest (from the, date of last payment to the, date of sale), , Illustration 1, In 20X1, M/s. Wye Ltd. issued 12% fully paid debentures of ` 100 each, interest being, payable half yearly on 30th September and 31st March of every accounting year., , © The Institute of Chartered Accountants of India

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9.10, , ACCOUNTING, , On 1st December, 20X2, M/s. Bull & Bear purchased 10,000 of these debentures, at ` 101 cum-interest price, also paying brokerage @ 1% of cum-interest amount, of the purchase. On 1st March, 20X3 the firm sold all of these debentures at ` 106, cum-interest price, again paying brokerage @ 1 % of cum-interest amount., Prepare Investment Account in the books of M/s. Bull & Bear for the period, 1st December, 20X2 to 1st March, 20X3., , Solution, In the books of M/s Bull & Bear, Investment Account, st, for the period from 1 December 20X2 to 1st March, 20X3, (Scrip: 12% Debentures of M/s. Wye Ltd.), Date Particulars Nominal Interest, Value, , Cost, , Date Particulars, , Nominal Interest, , (` ), , (` ), 1.12.20X2 ToBank, A/c, , loss A/c*, (b.f.), , (` ), , (` ), , 10,00,000 20,000 10,00,100 1.03.20X By Bank A/c, 3, , (W.N.1), 1.3.20X3 ToProfit &, , Cost, , Value, , -, , 30,000, , 10,00,000, , 50,000, , 9,99,400, , (W.N.2), , 1.3.20X3 By Profit, loss, , &, , A/c, , 700, , (b.f.), , 10,00,000 50,000 10,00,100, , 10,00,000, , 50,000, , 10,00,100, , * This represents income for M/s. Bull & Bear for the period 1st December, 20X2 to, 1st March, 20X3, i.e., interest for three months- 1st December, 20X2 to 28 February,, 20X3)., Working Notes:, 1., , Cost of 12% debentures purchased on 1.12.20X2, Cost Value (10,000 × ` 101), , Add: Brokerage (1% of ` 10,10,000), , Less: Cum Interest (10,000 x 100 x12% x 2/12), Total, 2., , `, =, , 10,10,000, , =, , (20,000), , =, , =, , Sale proceeds of 12% debentures sold, Sales Price (10,000 × ` 106), , Less: Brokerage (1% of ` 10,60,000), , © The Institute of Chartered Accountants of India, , 10,100, , 10,00,100, `, , =, , =, , 10,60,000, , (10,600)

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9.11, , INVESTMENT ACCOUNTS, Less: Cum Interest (10,000 x 100 x12% x 5/12), Total, , Illustration 2, , =, , =, , (50,000), , 9,99,400, , On 1.4.20X1, Mr. Krishna Murty purchased 1,000 equity shares of ` 100 each in TELCO, Ltd. @ ` 120 each from a Broker, who charged 2% brokerage. He incurred 50 paise per, ` 100 as cost of shares transfer stamps. On 31.1.20X2, Bonus was declared in the ratio, of 1: 2. Before and after the record date of bonus shares, the shares were quoted at, ` 175 per share and ` 90 per share respectively. On 31.3.20X2, Mr. Krishna Murty sold, bonus shares to a Broker, who charged 2% brokerage., Show the Investment Account in the books of Mr. Krishna Murty, who held the shares, as Current assets and closing value of investments shall be made at Cost or Market, value whichever is lower., , Solution, In the books of Mr. Krishna Murty, Investment Account, for the year ended 31st March, 20X2, (Scrip: Equity Shares of TELCO Ltd.), Date, 1.4.20X1 To, , Particulars, Bank, A/c, (W.N.1), , 31.1.20X2 To, , Bonus, shares, (W.N.5), , 31.3.20X2 To, , Profit, &, loss, A/c, (W.N.3), , Nominal, Value (`), , Cost, , Date, , Particulars, , (`), , 1,00,000 1,23,000 31.3.20X2 By Bank A/c, (W.N.2), 50,000, , −, , − 31.3.20X2 By Balance, c/d (W.N.4), , Nominal, Value (`), , Cost, (`), , 50,000, , 44,100, , 1,00,000, , 82,000, , 3,100, , 1,50,000 1,26,100, , 1,50,000 1,26,100, , Working Notes:, 1., , Cost of equity shares purchased on 1.4.20X1 = (1,000 ×` 120) + (2% of, ` 1,20,000) + (½% of ` 1,20,000) = ` 1,23,000, , 2., , Sale proceeds of equity shares (bonus) sold on 31st March, 20X2= (500 ×` 90), – (2% of ` 45,000) = ` 44,100., , © The Institute of Chartered Accountants of India

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9.12, , 3., , ACCOUNTING, , Profit on sale of bonus shares on 31st March, 20X2, = Sales proceeds – Average cost, , 4., , Sales proceeds, , = ` 44,100, , Average cost, , = ` (1,23,000 /1,50,000) x 50,000 = ` 41,000, , Profit, , = ` 44,100 – ` 41,000 = ` 3,100., , Valuation of equity shares on 31st March, 20X2, Cost = (` 1,23,000/1,50,000) x 1,00,000 = ` 82,000, Market Value = 1,000 shares × ` 90 = ` 90,000, Closing balance has been valued at ` 82,000 being lower than the market, value., , 5., , Bonus shares do not have any cost., , Illustration 3, Mr. X purchased 500 equity shares of ` 100 each in Omega Co. Ltd. for ` 62,500, inclusive of brokerage and stamp duty. Some years later the company resolved to, capitalise its profits and to issue to the holders of equity shares, one equity bonus share, for every share held by them. Prior to capitalisation, the shares of Omega Co. Ltd. were, quoted at ` 175 per share. After the capitalisation, the shares were quoted at ` 92.50, per share. Mr. X. sold the bonus shares and received at ` 90 per share., Prepare the Investment Account in X’s books on average cost basis., , Solution, In the books of A, Investment Account, [Scrip: Equity shares in Omega Co. Ltd.], Particulars, , Nominal, Value, , `, To Cash, , 50,000, , To Bonus shares (W.N.1), , 50,000, , To P & L A/c (W.N. 2), To Balance b/d, , Cost, , Particulars, , `, 62,500 By Cash - Sale (500 x 90), - By Balance c/d (W.N. 3), , -, , 13,750, , 1,00,000, , 76,250, , 50,000, , 31,250, , © The Institute of Chartered Accountants of India, , Nominal, Value, , Cost, , `, , `, , 50,000, , 45,000, , 50,000, , 31,250, , 1,00,000, , 76,250

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INVESTMENT ACCOUNTS, , 9.13, , Working Notes:, 1., , Bonus shares do not have any cost., , 2., , Profit on sale of bonus shares = Sales proceeds – Average cost, , 3., , Sales proceeds, , = ` 45,000, , Average cost, , =, , Profit, , = ` 45,000 – `31,250 = ` 13,750., , 500, × 62,500 = ` 31,250, 1,000, , Valuation of Closing Balance of Shares at the end of year, The total cost of 1,000 share including bonus is `62,500, Therefore, cost of 500 shares (carried forward) is, , 500, × 62,500 = ` 31,250, 1,000, , Market price of 500 shares = 92.50 x 500 = ` 46,250, Cost being lower than the market price, therefore shares is carried forward at cost., , Illustration 4, On 01-04-20X1, Mr. T. Shekharan purchased 5,000 equity shares of ` 100 each in V, Ltd. @ ` 120 each from a broker, who charged 2% brokerage. He incurred 50 paisa per, ` 100 as cost of shares transfer stamps. On 31-01-20X2 bonus was declared in the ratio, of 1: 2. Before and after the record date of bonus shares, the shares were quoted at, ` 175 per share and ` 90 per share respectively. On 31-03-20X2, Mr. T. Shekharan sold, bonus shares to a broker, who charged 2% brokerage., Show the Investment Account in the books of T. Shekharan, who held the shares as, Current Assets and closing value of investments shall be made at cost or market value, whichever is lower., , Solution, In the books of T. Shekharan, Investment Account, for the year ended 31st March, 20X2, (Script: Equity Shares of V Ltd.), Date, , 1.4.20X1, , Particulars, , To Bank, A/c, (W.N.1), , Nominal, Value, (` ), , Cost, (` ), , Date, , Particulars Nominal, Value, (` ), , 5,00,000 6,15,000 31.3.20X2 By Bank A/c, (W.N.2), , © The Institute of Chartered Accountants of India, , Cost, (` ), , 2,50,000 2,20,500

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9.14, , 31.1.20X2, 31.3.20X2, , ACCOUNTING, , To Bonus, To shares, Profit and, , 2,50,000, , Loss, A/c, (W.N.3), , − 31.3.20X2 By Balance, c/d, , 15,500, , 5,00,000 4,10,000, , (W.N.4), , 7,50,000 6,30,500, , 7,50,000 6,30,500, , Working Notes:, 1., , Cost of equity shares purchased on 1st April, 20X1, = Cost + Brokerage + Cost of transfer stamps, = (5,000 × ` 120) + (2% of ` 6,00,000) + (½% of ` 6,00,000), = ` 6,15,000, , 2., , Sale proceeds of equity shares sold on 31st March, 20X2, = Sale price – Brokerage, = (2,500 × ` 90) – (2% of ` 2,25,000), = ` 2,20,500, , 3., , Profit on sale of bonus shares, = Sales proceeds – Average cost, Sales proceeds = ` 2,20,500, , 4., , Average cost, , = ` (6,15,000 /7,50,000) x 2,50,000 = ` 2,05,000, , Profit, , = ` 2,20,500 – ` 2,05,000= ` 15,500., , Valuation of equity shares on 31st March, 20X2, Cost = ` [6,15,000 × 5,00,000/7,50,000] = ` 4,10,000, i.e., ` 82 per share, Market Value = 5,000 shares × ` 90 = ` 4,50,000, Closing stock of equity shares has been valued at ` 4,10,000 i.e. cost being, lower than the market value., , Illustration 5, On 1st April, 20X1, Rajat has 50,000 equity shares of P Ltd. at a book value of ` 15 per, share (nominal value ` 10 each). He provides you the further information:, (1), , On 20th June, 20X1 he purchased another 10,000 shares of P Ltd. at ` 16 per, share., , (2), , On 1st August, 20X1, P Ltd. issued one equity bonus share for every six shares, , © The Institute of Chartered Accountants of India

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INVESTMENT ACCOUNTS, , 9.15, , held by the shareholders., (3), , On 31st October, 20X1, the directors of P Ltd. announced a right issue which, entitles the holders to subscribe three shares for every seven shares at ` 15 per, share. Shareholders can transfer their rights in full or in part., , Rajat sold 1/3rd of entitlement to Umang for a consideration of ` 2 per share and, subscribed the rest on 5th November, 20X1., You are required to prepare Investment A/c in the books of Rajat for the year ending, 31st March, 20X2., , Solution, , Date, , In the books of Rajat, Investment Account, (Equity shares in P Ltd.), Particulars, , No. of Amount, shares, (`), , 1.4.X1, , To Balance b/d, , 1.8.X1, , To Bonus, 10,000, issue (W.N.1), , 5.11.X1, , To Bank A/c, (right shares), , 20.6.X1, , 50,000, , To Bank A/c, , 10,000, , (W.N.4), , 20,000, , Date, , 7,50,000 31.3.X2, 1,60,000, , Particulars, By Balance, (Bal. fig.), , No. of, shares, , Amount, (`), , c/d 90,000 12,10,000, , -, , 3,00,000, , 90,000 12,10,000, , 90,000 12,10,000, , Working Notes:, (1), , Bonus shares, , =, , 50,000 + 10,000, = 10,000 shares, 6, , (2), , Right shares, , =, , 50,000 + 10,000 + 10,000, × 3 = 30,000 shares, 7, , (3), , Sale of rights, , (4), , 2, Rights subscribed = 30,000 shares × × ` 15 = ` 3,00,000, 3, , 1, = 30,000 shares× × ` 2= ` 20,000 to be credited to, 3, statement of profit and loss, , © The Institute of Chartered Accountants of India

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9.16, , ACCOUNTING, , Illustration 6, On 1.4.20X1, Sundar had 25,000 equity shares of ‘X’ Ltd. at a book value of ` 15 per, share (Nominal value ` 10). On 20.6.20X1, he purchased another 5,000 shares of the, company at `16 per share. The directors of ‘X’ Ltd. announced a bonus and rights issue., No dividend was payable on these issues. The terms of the issue are as follows:, Bonus basis 1:6 (Date 16.8.20X1)., Rights basis 3:7 (Date 31.8.20X1) Price ` 15 per share., Due date for payment 30.9.20X1., Shareholders were entitled to transfer their rights in full or in part. Accordingly, Sundar, sold 33.33% of his entitlement to Sekhar for a consideration of ` 2 per share., Dividends: Dividends for the year ended 31.3.20X1 at the rate of 20% were declared by, X Ltd. and received by Sundar on 31.10.20X1. Dividends for shares acquired by him on, 20.6.20X1 are to be adjusted against the cost of purchase., On 15.11.20X1, Sundar sold 25,000 equity shares at a premium of ` 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 31.12.20X1and shares are, valued at average cost., , Solution, Books of Sundar, Investment Account, (Scrip: Equity Shares in X Ltd.), No., , Amount, , No., , `, 1.4.20X1, 20.6.20X1, , To Bal b/d, To Bank, , 25,000, 5,000, , 16.8.20X1, , To Bonus, (W.N.1), To Bank, (Rights, Shares), (W.N.3), , 5,000, , —, , 10,000, , 1,50,000, , 30.9.20X1, , `, , 3,75,000 31.10.20X1 By, Bank, 80,000, (dividend, , © The Institute of Chartered Accountants of India, , Amount, , on shares, acquired, on, 20/6/20X1), (W.N.4), , —, , 10,000

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9.17, , INVESTMENT ACCOUNTS, , 15.11.20X1, , To, Profit, (on sale of, shares), , 44,444 15.11.20X1 By Bank, , (Sale, shares), , 3,75,000, , 20,000, , 2,64,444, , 45,000, , 6,49,444, , of, , 31.12.20X1 By Bal. c/d, (W.N.6), 45,000, , 25,000, , 6,49,444, , Profit and Loss Account (An extract), To Balance c/d, , 1,04,444, , By Profit transferred, , 44,444, , By Sale of rights (W.N.3), , 10,000, , By Dividend (W.N.4), , 50,000, , 1,04,444, , 1,04,444, , Working Notes:, , ( 25,000+5,000 ), , (1), , Bonus Shares =, , (2), , Right Shares =, , (3), , Right shares renounced = 15,000×1/3 = 5,000 shares, , 6, , = 5,000 shares, , ( 25,000+5,000+5,000 ) ×3, 7, , = 15,000 shares, , Sale of right shares = 5,000 x 2 = ` 10,000, Right shares subscribed = 15,000 – 5,000 = 10,000 shares, Amount paid for subscription of right shares = 10,000 x 15 = ` 1,50,000, (4), , Dividend received = 25,000 (shares as on 1st April 20X1) × 10 × 20% = ` 50,000, Dividend on shares purchased on 20.6.20X1 = 5,000×10×20% = ` 10,000 is, adjusted to Investment A/c, , (5), , Profit on sale of 25,000 shares, = Sales proceeds – Average cost, Sales proceeds, , = ` 3,75,000, , Average cost, , =, , Profit, , = ` 3,75,000– ` 3,30,556= `44,444., , (3,75,000+80,000+1,50,000 -10,000 ) ×25,000 = ` 3,30,556, 45,000, , © The Institute of Chartered Accountants of India

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9.18, , (6), , ACCOUNTING, , Cost of shares on 31.12.20X1, , (3,75,000+80,000+1,50,000 -10,000 ) ×20,000 = ` 2,64,444, 45,000, , Illustration 7, On 1st January 20X1, Singh had 20,000 equity shares in X Ltd. Nominal value of the, shares was `10 each but their book value was ` 16 per share. On 1st June 20X1, Singh, purchased 5,000 more equity shares in the company at a premium of ` 4 per share., On 30th June, 20X1, 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, 20X1., The terms of the rights issue were:, (a), , Rights shares to be issued to the existing holders on 10th August, 20X1., , (b), , Rights issue would entitle the holders to subscribe to additional equity shares in, the Company at the rate of one share per every three held at ` 15 per share-the, whole sum being payable by 30th September, 20X1., , (c), , Existing shareholders were entitled to transfer their rights to outsiders, either, wholly or in part., , (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 ` 1.50 per share., , (e), , Dividends for the year ended 31st March, 20X1, at the rate of 15% were declared, by the Company and received by Singh on 20th October, 20X1., , (f), , On 1st November, 20X1, Singh sold 20,000 equity shares at a premium of ` 3 per, share., , The market price of share on 31-12-20X1 was ` 14. Show the Investment Account as it, would appear in Singh’s books on 31-12-20X1 and the value of shares held on that, date., , Solution, Investment Account-Equity Shares in X Ltd., Date, , 20X1, , Jan. 1, , No. of, shares, , To Bal.b/d, , 20,000, , Dividend, , Amount, , `, , `, , -, , Date, , 20X1, , 3,20,000 Oct. 20 By, , © The Institute of Chartered Accountants of India, , No. of, shares, , Bank, , Dividend Amount, , `, , `, , 30,000, , 7,500

Page 19 :
9.19, , INVESTMENT ACCOUNTS, , (dividend), [20,000 x, 10 x 15%], [5,000 x 10, x 15%], , June 1, , To Bank, , 5,000, , -, , 70,000 Nov. 1, , Sep. 30, , To Bank, (Right), (W.N.1), , 5,000, , -, , 75,000 Dec. 31 By Balance, , 30,000, , c/d (W.N.3), , Aug. 2, , Nov. 1, , To Bonus, Issue, , 5,000, , To Profit, &, Loss, A/c, (Dividend, income), 35,000, , Jan. 1, To, Balance, 20X2, b/d, , 30,000, , 15,000, , — Nov. 1, , By Bank, , By P & L, A/c (W.N.2), , 4,65,000, , 20,000, , 2,60,000, , 15,000, , 1,96,071, , 35,000, , 1,429, , 30,000, , 4,65,000, , 1,96,071, , Working Notes:, 1., , Right shares, No. of right shares issued = (20,000 + 5,000 + 5,000)/ 3 = 10,000 shares, No. of right shares subscribed = 10,000 x 50% = 5,000 shares, Amount of right shares issued = 5,000 x 15 = ` 75,000, No. of right shares sold = 10,000 – 5,000 = 5,000 shares, Sale of right shares = 5,000 x 1.5 = ` 7,500 to be credited to statement of profit, and loss, , 2., , Cost of shares sold — Amount paid for 35,000 shares, , `, (`3,20,000 + ` 70,000 + ` 75,000), Less: Dividend on shares purchased on June 1 (since the dividend, pertains to the year ended 31st March, 20x1, i.e., the pre-acquisition, period), Cost of 35,000 shares, , © The Institute of Chartered Accountants of India, , 4,65,000, (7,500), , 4,57,500

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9.20, , ACCOUNTING, , Cost of 20,000 shares (Average cost basis), , 2,61,429, , Sale proceeds, , 2,60,000, , Loss on sale, 3., , 1,429, , Value of investment at the end of the year, Assuming investment as current investment, closing balance will be valued, based on lower of cost or net realisable value., Here, Net realisable value is `14 per share i.e. 15,000 shares x ` 13= ` 2,10,000, 4,57,500, and cost =, ×15,000 = ` 1,96,071. Therefore, value of investment at, 35,000, the end of the year will be ` 1,96,071., , Illustration 8, The following transactions of Nidhi took place during the year ended 31st March 20X2:, 1st April, 12th April, , Purchased ` 12,00,000, 8% bonds at ` 80.50 cum-interest. Interest, is payable on 1st November and 1st May., Purchased 1,00,000 equity shares of ` 10 each in X Ltd. for, ` 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., Nidhi sold 1,25,000 bonus shares for ` 20 each., , 1st October, , Sold ` 3,00,000, 8% bonds at ` 81 ex-interest., , 1st November, , Received half-year's bond interest., , 1st December, , Received 18% interim dividend on equity shares (including bonus, shares) in X Ltd., , Prepare the relevant investment account in the books of Nidhi for the year ended, 31st March, 20X2., , Solution, In the books of Nidhi, 8% Bonds Account, [Interest Payable: 1st November & 1st May], Date, 1.4.20X1, , Particulars, To Bank A/c, , Nominal, , Interest, , Cost, , Value (`), , (`), , (`), , 12,00,000, , 40,000, , Date, , 9,26,000 1.5.20X1, , © The Institute of Chartered Accountants of India, , Particulars, By Bank A/c, , Nominal, , Interest, , Cost, , Value (`), , (`), , (`), , -, , 48,000, , -

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9.21, , INVESTMENT ACCOUNTS, , (W.N.1), 1.10.20X1, , 31.3.20X2, , To Profit &, Loss A/c (W.N, 6), , 1.10.20X1, 11,500, , To Profit &, Loss A/c, , 84,000, , 12,00,000, , 1,24,000, , (12,00,000 x, 8% x 6/12), , By Bank A/c, (W.N 2), , 3,00,000, , 1.11.20X1, , By Bank A/c, (W.N 3), , -, , 31.3.20X2, , By Balance, c/d (W.N.4), , 9,37,500, , 10,000 2,43,000, , 36,000, , -, , 9,00,000, , 30,000 6,94,500, , 12,00,000, , 1,24,000 9,37,500, , Investment in Equity Shares of X Ltd. Account, Date, , Particulars, , No., , 12.4.20X1 To Bank A/c, , 1,00,000, , 15.5.20X1 To Bonus Issue, , 1,50,000, , Dividend, , Cost, , (`), , (`), , Date, , Particulars, , No., , Dividend, (`), , 40,00,000 15.5.20X1 By Bank A/c, , 1,25,000, , 1.12.20X1 By Bank A/c, , Cost, (`), 25,00,000, , 2,25,000, , (W.N.7), 31.3.20X2 To Profit & Loss, , 31.3.20X2 By, , A/c (W.N 5), , 2,25,000, 2,50,000, , 5,00,000, , Balance, , c/d (W.N.8), , 2,25,000 45,00,000, , 1,25,000, , 20,00,000, , 2,50,000, , 2,25,000 45,00,000, , Working Notes:, 1., , Cost of investment purchased on 1st April, 20X1, 12,000, 8% bonds were purchased @ ` 80.50 cum-interest. Total amount paid, 12,000 bonds x ` 80.50 = 9,66,000 which includes accrued interest for 5, months, i.e., 1st November, 20XX to 31stMarch, 20X1. Accrued interest will be, ` 12,00,000 x 8/100x 5/12 = ` 40,000. Therefore, cost of investment purchased, = ` 9,66,000 – 40,000 = `9,26,000., Note: It has been assumed that the nominal value of a bond is ` 100., , 2., , Sale of bonds on 1st October, 20X1, 3,000 bonds were sold@ ` 81 ex-interest, i.e., Total amount received = 3,000 x 81, + accrued interest for 5 months =` 2,43,000 +`10,000 (3,00,000 x 8/100 x 5/12), , 3., , Interest received on 1st November, 20X1, Interest will be received for 9,000 bonds @ 8% for 6 months, i.e., ` 9,00,000 x, 8/100x1/2 = ` 36,000., , 4., , Cost of bonds on 31.3.20X1, Cost of bonds on 31.3.20X1 will be ` 9,26,000/ 12,000 x 9,000 = ` 6,94,500., , © The Institute of Chartered Accountants of India

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9.22, , ACCOUNTING, , Interest accrued on bonds on 31.3.20X1 = 9,00,000 x 8% x 5/12 = `30,000, 5., , Profit on sale of bonus shares, Cost per share after bonus = ` 40,00,000/ 2,50,000 = ` 16 (average cost, method being followed), Profit per share sold (` 20 – ` 16) = ` 4., Therefore, total profit on sale of 1,25,000 shares = ` 4 x 1,25,000 = ` 5,00,000., , 6., , Profit on sale of bonds, Sale value, Cost of `3,00,0008% bonds = 9,26,000/12,00,000 x 3,00,000, Profit, , 7., , Dividend on equity shares = 1,25,000 x 10 x 18% = ` 2,25,000, , 8., , Value of equity at end of year, , =, =, =, , `, 2,43,000, 2,31,500, 11,500, , Cost per share after bonus = ` 16, Number of shares = 1,25,000, Value of equity at end of year = 1,25,000 x 16 = ` 20,00,000, , Illustration 9, Smart Investments made the following investments in the year 20X1-X2:, 12% State Government Bonds having nominal value `100, Date, , Particulars, , 01.04.20X1, , Opening Balance (1200 bonds) book value of ` 126,000, , 02.05.20X1, 30.09.20X1, , Purchased 2,000 bonds @ ` 100 cum interest, Sold 1,500 bonds at ` 105 ex interest, , Interest on the bonds is received on 30th June and 31st Dec. each year., Equity Shares of X Ltd., 15.04.20X1, , Purchased 5,000 equity shares @ ` 200 on cum right, basis, Brokerage of 1% was paid in addition (Nominal Value of, shares ` 10), , 03.06.20X1, , The company announced a bonus issue of 2 shares for, every 5 shares held., , © The Institute of Chartered Accountants of India

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9.23, , INVESTMENT ACCOUNTS, , 16.08.20X1, , The company made a rights issue of 1 share for every 7, shares held at ` 250 per share., The entire money was payable by 31.08.20X1., , 22.8.20X1, , Rights to the extent of 20% was sold @ ` 60. The, remaining rights were subscribed., , 02.09.20X1, , 15.01.20X2, , Dividend @ 15% for the year ended 31.03.20X1 was, received on 16.09.20X1, Sold 3,000 shares @ ` 300. Brokerage of 1% was, incurred extra., Received interim dividend @ 10% for the year 20X1 –X2, , 31.03.20X2, , The shares were quoted in the stock exchange @ ` 220, , 15.12.20X1, , Prepare Investment Accounts in the books of Smart Investments. Assume that the, average cost method is followed., , Solution, In the books of Smart Investments, 12% Govt. Bonds for the year ended 31st March, 20X2, Date, 1.4.X1, , 2.5.X1, , Particulars, , Nos., , To Opening, balance b/d, (W.N.7), , 1,200, , To Bank, A/c, (W.N.8), , 2,000, , Interest, 3,600, , Amount, , Nos., , Interest, , -, , 19,200, , -, , A/c, &, , 1,500, , 4,500, , 1,57,500, , 8,437.50 31.12.X1 By Bank, A/c, (Interest), , -, , 10,200, , -, , 1,26,000, , Date, , Particulars, , 30.6.X1 By Bank, A/c, (Interest), , Amount, , (3,200 x 100, x 12% x, 6/12), 8,000, , 30.9.X1 To P & L A/c, (Profit, on, Sale) (W.N.1), , 1,92,000, , 30.9.X1 By Bank, (W.N.1, W.N.9), , (1,700 x 100, x 12% x, 6/12), , 31.3.X2 To P & L A/c, , 27,400, , 31.3.X2 By Bal., , (W.N.2, W.N.10), , (Interest), 3,200, , 39,000, , 3,26,437.50, , © The Institute of Chartered Accountants of India, , c/d, , &, , 1,700, , 5,100 1,68,937.50, , 3,200, , 39,000 3,26,437.50

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9.24, , ACCOUNTING, , Investments in Equity shares of X Ltd. for year ended 31.3.20X2, Date, , Particulars, , Nos. Dividend, , 15.4.X1, , To Bank A/c 5,000, (W.N.3), , 3.6.X1, , To Bonus, Issue, , 31.8.X1, , To Bank A/c, (W.N.11), , 15.12.X1, , To P & L A/c, (W.N.5), , 31.3.X2, , To P & L A/c, , 2,000, , Amount, , Particulars, , 16.9.X1, , By Bank, (Dividend), (5,000 x 10, x, 15%), (refer note, 1 and 2), , Nos. Dividend, , Amount, , 10,10,000, -, , 800, , -, , -, , -, , 7,500, , 2,00,000 15.12.X1 By Bank (Sale) 3,000, (W.N.4), , -, , 8,91,000, , 4,28,500, , 4,800, 7800, , Date, , 15.1.X2, , By Bank, (interim, dividend), (W.N.12), , 31.3.X2, , c/d 4,800, By Bal., (W.N.6), , 7,40,000, , 7800, , 4,800 16,38,500, , 4,800 16,38,500, , 4,800, , Working Notes:, 1., , Profit on sale of bonds on 30.9.X1, = Sales proceeds – Average cost, , 2., , Sales proceeds, , = `1,57,500 (i.e., 1,500 x 105), , Average cost, , = ` [(1,26,000+1,92,000) ×1,500/3,200] = 1,49,062.50, , Profit, , = 1,57,500– ` 1,49,062.50=`8,437.50, , Valuation of bonds on 31st March, 20X2, Cost, , 3., , = `3,18,000/3,200 x1,700 = 1,68,937.50, , Cost of equity shares purchased on 15/4/20X1, = Cost + Brokerage, = (5,000 ×` 200) + 1% of (5,000 ×` 200) =` 10,10,000, , 4., , Sale proceeds of equity shares on 15/12/20X1, = Sale price – Brokerage, = (3,000 ×` 300) – 1% of (3,000 ×` 300) =` 8,91,000., , © The Institute of Chartered Accountants of India

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INVESTMENT ACCOUNTS, 5., , 9.25, , Profit on sale of shares on 15/12/20X1, = Sales proceeds – Average cost, Sales proceeds, , = ` 8,91,000, , Average cost, , = ` [(10,10,000+2,00,000-7,500) × 3,000/7,800], = ` [12,02,500 × 3,000/7,800] = 4,62,500, , Profit, 6., , = ` 8,91,000 – `4,62,500=` 4,28,500., , Valuation of equity shares on 31st March, 20X2, Cost, , = ` [12,02,500× 4,800/7,800]= ` 7,40,000, , Market Value, , = 4,800 shares × ` 220 = ` 10,56,000, , Closing stock of equity shares has been valued at ` 7,40,000 i.e. cost being, lower than the market value., 7., , Interest accrued on opening balance of bonds = 1,200 x 100 x 12% x 3/12, = ` 3,600, , 8., , Interest element in bonds purchased on 02.05.20X1, = 2,000 x 100 x 12% x 4/12 = ` 8,000, Cost of investment (amount in investment column), = (2,000 x 100) – 8,000 = ` 1,92,000, , 9., , Interest element in bonds sold on 30.09.20X1, = 1,500 x 100 x 12% x 3/12 = ` 4,500, , 10., , Interest accrued on closing balance of bonds, = 1,700 x 100 x 12% x 3/12 = ` 5,100, , 11., , Right shares, No. of right shares issued, , = (5,000 + 2,000) x 1/7 = 1,000 shares, , No. of right shares sold, , = 1,000 x 20% = 200 shares, , Proceeds from sale of right shares, = 200 x 60 = ` 12,000, to be credited to statement of profit and loss, No. of right shares subscribed, , = 1,000 – 200 = 800 shares, , Amount of right shares subscribed, , = 800 x 250 = ` 2,00,000, , © The Institute of Chartered Accountants of India

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9.26, , 12., , ACCOUNTING, , Amount of interim dividend = (5,000 + 2,000 + 800 – 3,000) x 10 x 10%, = ` 4,800, , Note:, 1., , It is presumed that no dividend is received on bonus shares as bonus shares, are declared on 3.6.20X1 and dividend pertains to the year ended 31.03.20X1 ., , 2., , The amount of dividend for the period, for which shares were not held by the, investor, has been treated as capital receipt., , Illustration 10, Mr. Brown has made following transactions during the financial year 20X1-X2:, Date, , Particulars, , 01.05.20X1, , Purchased 24,000 12% Bonds of ` 100 each at ` 84 cum-interest., Interest is payable on 30th September and 31st March every year., , 15.06.20X1, , Purchased 1,50,000 equity shares of ` 10 each in Alpha Limited for, ` 25 each through a broker, who charged brokerage @ 2%., , 10.07.20X1, , Purchased 60,000 equity shares of ` 10 each in Beeta Limited for ` 44, each through a broker, who charged brokerage @2%., , 14.10.20X1, , Alpha Limited made a bonus issue of two shares for every three shares, held., , 31.10.20X1, , Sold 80,000 shares in Alpha Limited for ` 22 each., , 01.01.20X2, , Received 15% interim dividend on equity shares of Alpha Limited., , 15.01.20X2, , Beeta Limited made a right issue of one equity share for every four, shares held at ` 5 per share. Mr. Brown exercised his option for 40% of, his entitlements and sold the balance rights in the market at ` 2.25, per share., , 01.03.20X2, , Sold 15,000 12% Bonds at ` 90 ex-interest., , 15.03.20X2, , Received 18% interim dividend on equity shares of Beeta Limited., , Interest on 12% Bonds was duly received on due dates., Prepare separate investment account for 12% Bonds, Equity Shares of Alpha Limited, and Equity Shares of Beeta Limited in the books of Mr. Brown for the year ended on, 31st March, 20X2., , © The Institute of Chartered Accountants of India

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9.27, , INVESTMENT ACCOUNTS, , Solution, In the books of Mr. Brown, 12% Bonds for the year ended 31st March, 20X2, Date, , Particulars, , 20X1, , To Bank A/c, , May, 1, , (W.N.7), , No., 24,000, , Income, , Amount, , `, , `, , 24,000, , Date, , 19,92,000 20X1, Sept. 30, , Particulars, , No., , By Bank-, , Income, , Amount, , `, , `, , -, , 1,44,000, , 15,000, , 75,000, , Interest, (24,000 x, 100 x 12%, x 6/12), , 20X2, , To P & L A/c, , March 1, , (W.N.1), , -, , -, , 1,05,000 20X2, , By Bank, , 13,50,000, , A/c, , Mar. 1, , (W.N.8), 20X2, , To P & L A/c, , March 31, , (b.f.), , 2,49,000, , 20X2, , By Bank-, , Mar. 31, , Interest, , 54,000, , (9,000 x, 100 x 12%, x 6/12), By Balance, c/d, (W.N.2), 24,000, , 2,73,000, , 20,97,000, , 9,000, , -, , 7,47,000, , 24,000, , 2,73,000, , 20,97,000, , Investment in Equity shares of Alpha Ltd. for the year ended 31st March, 20X2, Date, , Particulars, , 20X1, , To Bank A/c, , June, , ([1,50,000 x, , 15, , 25] + [2% x, , No., 1,50,000, , Income, , Amount, , `, , `, --, , Date, , 38,25,000 20X1, , Particulars, By Bank A/c, , No., 80,000, , Income, , Amount, , `, , `, -, , 17,60,000, , Oct. 31, , (1,50,000 x, 25)]), Oct. 14, , To Bonus, Issue, , 1,00,000, , -, , - 20X2, Jan. 1, , (1,50,000/3, , Oct. 31, , To P & L A/c, (W.N.3), , 2,55,000, , –dividend, (1,70,000 x, , x2), 20X1, , By Bank A/c, , 10 x 15%), 5,36,000 March, 31, , By Balance, c/d, (W.N.4), , © The Institute of Chartered Accountants of India, , 1,70,000, , -, , 26,01,000

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9.28, , 20X2, , ACCOUNTING, , To P & L A/c, , Mar., , 2,55,000, , 31, 2,50,000, , 2,55,000, , 43,61,000, , 2,50,000, , 2,55,000, , 43,61,000, , Investment in Equity shares of Beeta Ltd. for the year ended 31st March, 20X2, Date, , Particulars, , No., , Income, , Amount, , `, , `, , 60,000, , --, , Date, , 26,92,800 20X2, , Particulars, , 20X1, , To Bank A/c, , July, , ([60,000 x 44], , Mar., , By Bank –, dividend, , 10, , + [2% x, , 15, , [(60,000 +, , No., , Income, , Amount, , `, , `, , -, , 1,18,800, , 66,000, , -, , 27,22,800, , 66,000, , 1,18,800, , 27,22,800, , 6,000) x 10, , (60,000 x 44)]), , x 18%], 20X2, Jan., , To Bank A/c, , 6,000, , -, , 30,000 March, , (W.N. 5), , By Balance, , 31, , 15, March, , c/d, (bal. fig.), , To P & L A/c, , 31, , -, , 1,18,800, , -, , 66,000, , 1,18,800, , 27,22,800, , Working Notes:, 1., , Profit on sale of 12% Bond, Sales price, , 19,92,000, x 15,000, Less: Cost of bond sold =, 24,000, Profit on sale, 2., , ` 13,50,000, (` 12,45,000), ` 1,05,000, , Closing balance as on 31.3.20X2 of 12 % Bond, , 19,92,000, x 9,000 = ` 7,47,000, 24,000, 3., , Profit on sale of equity shares of Alpha Ltd., Sales price, Less: Cost of bond sold =, Profit on sale, , 38,25,000, x 80,000, 2,50,000, , © The Institute of Chartered Accountants of India, , ` 17,60,000, (` 12,24,000), ` 5,36,000

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INVESTMENT ACCOUNTS, 4., , 9.29, , Closing balance as on 31.3.20X2 of equity shares of Alpha Ltd., , 38,25,000, x 1,70,000 = ` 26,01,000, 2,50,000, 5., , Calculation of right shares subscribed by Beeta Ltd., Right Shares =, , 60,000 shares, x 1= 15,000 shares, 4, , Shares subscribed by Mr. Brown = 15,000 x 40%= 6,000 shares, Value of right shares subscribed = 6,000 shares @ ` 5 per share = ` 30,000, 6., , Calculation of sale of right entitlement by Beeta Ltd., No. of right shares sold = 15,000 - 6,000 = 9,000 shares, Sale value of right = 9,000 shares x ` 2.25 per share = ` 20,250, Note: As per para 13 of AS 13, sale proceeds of rights is to be credited to P & L, A/c., , 7., , Purchase of bonds on 01.05.20X1, Interest element in purchase of bonds = 24,000 x 100 x 12% x 1/12 = ` 24,000, Investment element in purchase of bonds = (24,000 x 84) – 24,000 = `, 19,92,000, , 8., , Sale of bonds on 01.03.20X2, Interest element in purchase of bonds = 15,000 x 100 x 12% x 5/12 = ` 75,000, Investment element in purchase of bonds = 15,000 x 90 = ` 13,50,000, , Illustration 11, A Limited purchased 5,000 equity shares (nominal value ` 100 each) of Allianz Limited, for ` 105 each on 1st April, 20X1. The shares were quoted cum dividend. On 15th May,, 20X1, Allianz Limited declared & paid dividend of 2% for year ended 31st March, 20X1., On 30th June, 20X1 Allianz Limited issued bonus shares in ratio of 1:5. On 1st October,, 20X1 Allianz Limited issued rights share in the ratio of 1:12 @ 45 per share. A Limited, subscribed to half of the rights issue and the balance was sold at ` 5 per right, entitlement. The company declared interim dividend of 1% on 30th November, 20X1., Right shares were not entitled to dividend. The company sold 3,000 shares on 31st, December, 20X1 at ` 95 per share. The company A Ltd. incurred 2% as brokerage while, buying and selling shares., © The Institute of Chartered Accountants of India

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9.30, , ACCOUNTING, , You are required to prepare Investment Account in books of A Ltd for the year ended, 31st March, 20X2., , Solution, In the books of A Ltd., Investment in equity shares of Allianz Ltd., for the year ended 31st March, 20X2, Date, , Particulars, , No., , Dividend, , Amount, , `, , `, , Date, , 20X1, , Particulars, , To Bank A/c, (W.N.1), , 5,000, , -, , June 30, , To, Bonus, Issue (W.N 2), , 1,000, , -, , Oct. 1, , To Bank A/c, , 250, , -, , Dec.31, , To P & L A/c, (W.N. 5), , -, , -, , (W.N. 3), , 5,35,500 May 15, , Amount, , `, , `, , By Bank A/c, (dividend), (W.N.6), , -, , -, , 10,000, , 11,250 Nov. 30, , By Bank A/c, , -, , 6,000, , -, , 21,660 Dec. 31, , By Bank A/c, (W.N.5), , 3,000, , -, , 2,79,300, , 3,250, , -, , 2,79,110, , 6,250, , 6,000, , 5,68,410, , -, , 20X2, , (Interim, dividend), (W.N.7), , 20X2, , March 31 To P & L A/c, , -, , (b.f.), , 6,250, , 6,000, , 6,000, , - March 31 By Balance, c/d, (W.N. 7), , 5,68,410, , Working Notes:, Calculation of cost of purchase on 1st April, 20X1, ` 105 X 5,000 shares = ` 5,25,000, Add: Brokerage (2%) = `, , 10,500, , ` 5,35,500, 2., , Dividend, , 20X1, , April 1, , 1., , No., , Calculation of number of bonus shares issued, Bonus Shares =, , 5,000, ×1=1,000, 5, , © The Institute of Chartered Accountants of India

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9.31, , INVESTMENT ACCOUNTS, 3., , Calculation of right shares subscribed, Right Shares =, , 6,000, =500 shares, 12, , Shares subscribed =, , 500, = 250 shares, 2, , Value of right shares subscribed = 250 shares @ ` 45 per share = ` 11,250, 4., , Calculation of sale of right entitlement, 250 shares x ` 5 per share = ` 1,250, (Amount received from sale of rights will be credited to P&L a/c), , 5., , Calculation of profit on sale of shares, Total holding, , =, , 5,000 shares, , original, , 1,000 shares, , bonus, , 250 shares, , right shares, , 6,250 shares, 3,000 shares were sold on 31.12.20X1, Cost of total holdings of 6,250 shares (on average basis), = ` 5,35,500 + ` 11,250 – ` 10,000 = ` 5,36,750, Average cost of 3,000 shares would be, =, , 5,36,750, × 3,000 = ` 2,57,640, 6,250, , `, Sale proceeds of 3,000 shares (3,000 x ` 95), Less: 2% Brokerage, Less: Cost of 3,000 shares, Profit on sale, 6., , 2,85,000, (5,700), , 2,79,300, (2,57,640), , 21,660, , Dividend received on investment held as on 15th May, 20X1, = ` 10,000 (5,000 x ` 100 x 2%) adjusted to Investment A/c, , 7., , Dividend amounting ` 6,000 received on 30.11.20X1 will be credited to, P&L A/c, , © The Institute of Chartered Accountants of India

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9.32, , 8., , ACCOUNTING, , Calculation of closing value of shares (on average basis) as on, 31st March, 20X2, 5,36,750, × 3,250 = ` 2,79,110, 6,250, , 5. RECLASSIFICATION OF INVESTMENT, When Investments are classified from Current Investments to Long-term Investments,, transfer is made at Cost and Fair Value, whichever is less (at the date of transfer)., When Investments are classified from Long-term Investments to Current Investments,, transfer is made at Cost and Carrying Amount, whichever is less (at the date of, transfer)., Reclasiifiaction of Investment, , Current to Long-term, , Transfer at Lower of cost & fair, value at the date of transfer, , Long-term to Current, , Transfer at lower of cost &, carrying amount at the date of, transfer, , SUMMARY, •, , Investment Accounting is done as per Accounting Standard-13., , •, , Two types of Investments:, , , Current Investments – readily realisable and intended to be held for not, more than one year from the date on which investment is made, , , , Long-term Investments- other than current investments, , •, , Valuation of Current investment – Lower of Cost or Fair Value, , •, , Valuation of Long-term investment – At cost less ‘other than temporary’, decline, , © The Institute of Chartered Accountants of India

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9.33, , INVESTMENT ACCOUNTS, , •, , •, , Reclassification:, , , From Current to Long-term → Valuation at Cost and Fair value,, whichever is lower, , , , From Long-term to Current → Valuation at Cost and Carrying Amount,, whichever is lower, , Disposal of Investment:, , , Difference between carrying amount and disposal proceeds is transferred, to Profit & Loss A/c., , In case of partial sale, weighted average method to be used., Accounting for interest, dividend, etc., Nature of, income, , Pre-acquisition period, , Interest, , Interest accruing, acquisition, , Dividend, , Declared, from, acquisition profits, , Accounting Deducted from, investment, , Post-acquisition period, , before Interest accruing after acquisition, pre- Declared, profits, cost, , MCQ, Choose the most appropriate option as the answer:, , 2., , The cost of Right shares is, (a), , added to the cost of investments., , (b), , subtracted from the cost of investments., , (c), , no treatment is required., , Long term investments are carried at, (a), , fair value., , (b), , cost less ‘other than temporary’ decline., , (c), , Cost and market value whichever is less., , © The Institute of Chartered Accountants of India, , post-acquisition, , of Recognised as an income, , TEST YOUR KNOWLEDGE, , 1., , from

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9.34, , 3, , 4., , 5., , 6., , 7., , 8., , ACCOUNTING, , Current investments are carried at, (a), , Fair value., , (b), , cost., , (c), , Cost and fair value, whichever is less., , A Ltd. acquired 2,000 equity shares of Omega Ltd. on cum-right basis at ` 75, per share. Subsequently, omega Ltd. made a right issue of 1:1 at ` 60 per share,, which was subscribed for by A. Total cost of investments at the year-end will be, `, (a), , 2,70,000., , (b), , 1,50,000., , (c), , 1,20,000., , Cost of investment includes, (a), , Purchase costs., , (b), , Brokerage and Stamp duty paid., , (c), , Both (a) and (b)., , A current investment is an investment, (a), , That is readily realisable., , (b), , That is intended to be held for not more than one year from the date on, which such investment is made., , (c), , Both (a) and (b), , All the following are fixed income bearing securities except, (a), , Debentures., , (b), , Equity shares., , (c), , Govt. Bonds., , If there is ‘other than temporary’ decline in the value of a long term investment, then, (a), , Carrying amount is reduced to recognise the decline., , (b), , The reduction in carrying amount is charged to profit and loss account., , (c), , Both (a) and (b)., , © The Institute of Chartered Accountants of India

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INVESTMENT ACCOUNTS, 9., , 10., , 9.35, , If investment is acquired by issue of shares, the acquisition cost of investment, is, (a), , Amount paid for acquisition., , (b), , Fair value of securities issued., , (c), , Market price of securities., , When long-term investments are reclassified as current investments, current, investments are valued at, (a), , Cost., , (b), , Carrying amount., , (c), , Lower of Cost and Carrying amount., , THEORETICAL QUESTIONS, 1., , How will you classify the investments as per AS 13? Explain in Brief., , PRACTICAL QUESTIONS, Question 1, On 1st April, 20X1, XY Ltd. has 15,000 equity shares of ABC Ltd. at a book value of `, 15 per share (nominal value ` 10 per share). On 1st June, 20X1, XY Ltd. acquired 5,000, equity shares of ABC Ltd. for ` 1,00,000. ABC Ltd. announced a bonus and right, issue., (1), , Bonus was declared, at the rate of one equity share for every five shares held,, on 1st July 20X1., , (2), , Right shares are to be issued to the existing shareholders on 1st September, 20X1. The company will issue one right share for every 6 shares at 20%, premium. No dividend was payable on these shares., , (3), , Dividend for the year ended 31.3.20X1 were declared by ABC Ltd. @ 20%,, which was received by XY Ltd. on 31st October 20X1., , XY Ltd., (i), , Took up half the right issue., , (ii), , Sold the remaining rights for ` 8 per share., , (iii), , Sold half of its shareholdings on 1st January 20X2 at ` 16.50 per share., Brokerage being 1%., , © The Institute of Chartered Accountants of India

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9.36, , ACCOUNTING, , You are required to prepare Investment account of XY Ltd. for the year ended 31st, March 20X2 assuming the shares are being valued at average cost., Question 2, The following information is presented by Mr. Z (a stock broker), relating to his, holding in 9% Central Government Bonds., Opening balance (nominal value) ` 1,20,000, Cost ` 1,18,000 (Nominal value of each, unit is ` 100)., 1.3.20X1, , Purchased 200 units, ex-interest at ` 98., , 1.7.20X1, , Sold 500 units, ex-interest out of original holding at ` 100., , 1.10.20X1, , Purchased 150 units at ` 98, cum interest., , 1.11.20X1, , Sold 300 units, ex-interest at ` 99 out of original holdings., , Interest dates are 30th September and 31st March. Mr. Z closes his books every, 31st December. Show the investment account as it would appear in his books. Mr. Z, follows FIFO method., Question 3, Mr. Purohit furnishes the following details relating to his holding in 8% Debentures (`, 100 each) of P Ltd., held as Current assets:, 1.4.20X1, , Opening balance – Nominal value ` 1,20,000, Cost ` 1,18,000, , 1.7.20X1, , 100 Debentures purchased ex-interest at ` 98, , 1.10.20X1, , Sold 200 Debentures ex-interest at ` 100, , 1.1.20X2, , Purchased 50 Debentures at ` 98 cum-interest, , 1.2.20X2, , Sold 200 Debentures ex-interest at V 99, , Due dates of interest are 30th September and 31st March., Mr. Purohit closes his books on 31.3.20X2. Brokerage at 1% is to be paid for each, transaction. Show Investment account as it would appear in his books. Assume FIFO, method. Market value of 8% Debentures of P Limited on 31.3.20X2 is ` 99., , ANSWERS/ SOLUTIONS, MCQs, 1. (a), , 2. (b) 3. (c), , 4. (a), , 5. (c), , 6. (c), , © The Institute of Chartered Accountants of India, , 7. (b) 8. (c), , 9. (b) 10. (c)

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INVESTMENT ACCOUNTS, , 9.37, , THEORETICAL QUESTIONS, 1., , The investments are classified into two categories as per AS 13, viz., Current, Investments and Long-term Investments. A current Investment is an investment, that is by its nature readily realisable and is intended to be held for not more, than one year from the date on which such investment is made. 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, statement of profit and loss. A long-term investment is an investment other, than a current investment. Long term investments are usually carried at cost., However, when there is a decline, other than temporary, in the value of a long, term investment, the carrying amount is reduced to recognise the decline. The, reduction in carrying amount is charged to the statement of profit and loss., , PRACTICAL QUESTIONS, Answer 1, In the books of XY Ltd., Investment in equity shares of ABC Ltd., for the year ended 31st March, 20X2, Date, , Particulars, , No., , Income Amount, `, , 20X1, , To Balance b/d, , 15,000, , Date, , Particulars, , No., , Income Amount, , `, -, , `, , 2,25,000 20X1 Oct. By Bank, , April 1, , 31, , `, , -, , 30,000, , 10,000, , 13,000, , -, , 2,12,355, , 13,000, , -, , 1,69,500, , 26,000, , 30,000, , 3,91,855, , A/c, (W.N. 5), , June 1, July 1, , To Bank A/c, To Bonus Issue, , 5,000, 4,000, , --, , 1,00,000 20X2, , (W.N.4), , - March, , By Balance c/d, , (W.N. 1), Sept.1, , To Bank A/c, , By Bank A/c, , Jan. 1, 31, 2,000, , -, , 24,000, , -, , -, , 42,855, , -, , 30,000, , -, , 26,000, , 30,000, , 3,91,855, , (W.N. 6), , (W.N. 2), 20X2, Jan 1, “20X2, , To P & L A/c, (W.N. 4), To P & L A/c, , March 31, , © The Institute of Chartered Accountants of India

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9.38, , ACCOUNTING, , Working Notes:, 1., , Calculation of no. of bonus shares issued, Bonus Shares =, , 2., , 15,000 shares+5,000 shares, x 1= 4,000 shares, 5, , Calculation of right shares subscribed, Right Shares =, , 15,000 shares+5,000 shares+4,000 shares, = 4,000 shares, 6, , Shares subscribed by XY Ltd. =, , 4,000, = 2,000 shares, 2, , Value of right shares subscribed = 2,000 shares @ ` 12 per share = ` 24,000, 3., , Calculation of sale of right entitlement, 2,000 shares x ` 8 per share = ` 16,000, Amount received from sale of rights will be credited to statement of profit and, loss., , 4., , Calculation of profit on sale of shares, Total holding, , =, , 15,000 shares original, 5,000 shares purchased, 4,000 shares bonus, 2,000 shares right shares, 26,000 shares, , 50% of the holdings were sold, i.e. 13,000 shares (26,000 x1/2) were sold., Cost of total holdings of 26,000 shares (on average basis), = ` 2,25,000 + ` 1,00,000 + ` 24,000– ` 10,000, = ` 3,39,000, Average cost of 13,000 shares would be, =, , 3,39,000, ×13,000 = ` 1,69,500, 26,000, , © The Institute of Chartered Accountants of India

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9.39, , INVESTMENT ACCOUNTS, , `, Sale proceeds of 13,000 shares (13,000 x `16.50), Less: 1% Brokerage, , 2,14,500, (2,145), 2,12,355, , Less: Cost of 13,000 shares, , (1,69,500), , Profit on sale, , 42,855, , Dividend received on investment held as on 1st April, 20X1, , 5., , = 15,000 shares x ` 10 x 20%, = ` 30,000 will be transferred to Profit and Loss A/c, Dividend received on shares purchased on 1st June, 20X1, = 5,000 shares x ` 10 x 20% = `10,000 will be adjusted to Investment A/c, It is presumed that no dividend is received on bonus shares as bonus, shares are declared on 1st July, 20X1 and dividend pertains to the year, ended 31.3.20X1., , Note:, , Calculation of closing value of shares (on average basis) as on, 31st March, 20X2, , 6., , 13,000×, , 3,39,000, = ` 1,69,500, 26,000, , Answer 2, In the Books of Mr. Z, 9% Central Government Bonds (Investment) Account, Particulars, , Nominal Interest Principal, , Particulars, , Value, 20X1, Jan.1, , b/d, , (W.N.1), March To, 1, , July 1, , Value, , `, To Balance, , Bank, , A/c, , (W.N.2), To, , A/c, , P&L, , Nominal Interest Principal, , `, , 1,20,000, , 20X1, , `, , 2,700, , 20,000, , 750, , -, , -, , `, , March By Bank, , 1,18,000 31, , 19,600, , July 1, , A/c, , (W.N.3), By Bank, A/c, , (W.N.4), , 833 Sept., 30, , © The Institute of Chartered Accountants of India, , By Bank, A/c, , `, , `, , -, , 6,300, , -, , 50,000, , 1,125, , 50,000, , -, , 4,050, , -

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9.40, , ACCOUNTING, , (W.N.5), Oct. 1 To, , Bank, , A/c, , (150 x 98), Nov., 1, , To, , A/c, , P&L, , (W.N.6), 15,000, , -, , -, , -, , Nov., , 14,700 1, , 200 Dec., 31, , (W.N.8), , By Bank, A/c, , 30,000, , 225, , 29,700, , Balance, , 75,000, , 1,688, , 73,633, , 1,55,000, , 13,388, , 1,53,333, , (W.N.7), By, , c/d, , (W.N. 9 &, W.N.10), , Dec., 31, , To, , A/c, , P&L, , (b.f.), , 9,938, , (Transfer), 1,55,000, , 13,388, , 1,53,333, , Working Note:, 1., , Interest element in opening balance of bonds = 1,20,000 x 9% x 3/12 = ` 2,700, , 2., , Purchase of bonds on 1. 3.20X1, Interest element in purchase of bonds = 200 x 100 x 9% x 5/12 = ` 750, Investment element in purchase of bonds = 200 x 98 = ` 19,600, , 3., , Interest for half-year ended 31 March = 1,400 x 100 x 9% x 6/12 = ` 6,300, , 4., , Sale of bonds on 1.7.20X1, Interest element = 500 x 100 x 9% x 3/12 = ` 1,125, Investment element = 500 x 100 = ` 50,000, , 5., , Profit on sale of bonds on 1.7.20X1, Cost of bonds = (1,18,000/ 1,200) x 500 = ` 49,167, Sale proceeds = ` 50,000, Profit element = ` 833, , 6., , Interest for half-year ended 30 September, = 900 x 100 x 9% x 6/12 = ` 4,050, , 7., , Sale of bonds on 1.11.20X1, Interest element = 300 x 100 x 9% x 1/12 = ` 225, , © The Institute of Chartered Accountants of India

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9.41, , INVESTMENT ACCOUNTS, Investment element = 300 x 99 = ` 29,700, 8., , Profit on sale of bonds on 1.11.20X1, Cost of bonds = (1,18,000/ 1,200) x 300 = ` 29,500, Sale proceeds = ` 29,700, Profit element = ` 200, , 9., , Closing value of investment, Calculation of closing balance:, , Nominal, value, , `, , Bonds in hand remained in hand at 31st, December 20X1, From original holding, (1,20,000 – 50,000 – 30,000)=, , 40,000, , Purchased on 1st March, , 20,000, , 19,600, , Purchased on 1 October, , 15,000, , 14,700, , 75,000, , 73,633, , st, , 10., , 39,333, , 1,18,000, × 40,000, 1,20,000, , Interest element in closing balance of bonds = 750 x 100 x 9% x 3/12 =, ` 1,688, , Answer 3, Investment A/c of Mr. Purohit, for the year ending on 31-3-20X2, (Scrip: 8% Debentures of P Limited), (Interest Payable on 30th September and 31st March), Date, , Particulars, , Nominal, , Interest, , Cost, , Date, , Particulars, , Value, , To Balance b/d, , 1,20,000, , Interest, , Cost, , Value, , `, 1.4.20X1, , Nominal, , -, , `, 1,18,000 30.9.20X1, , By Bank (1,300, , `, , `, , -, , 5,200, , -, , 20,000, , -, , 19,800, , 20,000, , 533, , 19,602, , x 100 x 8% x, 6/12), 1.7.20X1, , To Bank (ex-, , 10,000, , 200, , 9,898 1.10.20X1, , Interest) (W.N.1), 1.10.20X1 To Profit & Loss, , By Bank, (W.N.4), , 133 1.2.20X2, , A/c (W.N.4), , © The Institute of Chartered Accountants of India, , By Bank (exInterest)

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9.42, , ACCOUNTING, , (W.N.5), 1.1.20X2, , To Bank (cum-, , 5,000, , 100, , 4,849 1.2.20X2, , Interest) (W.N.2), , By Profit &, , 64, , Loss A/c, (W.N.5), , 31.3.20X2 To Profit & Loss, , -, , 9,233, , 31.3.20X2, , By Bank (950 x, , -, , 3,800, , -, , 95,000, , -, , 93,414, , 100 x 8% x, , A/c(Bal. fig.), , 6/12), 31.3.20X2, , By Balance c/d, (W.N.3), , 1,35,000, , 9,533, , 1,32,880, , 1,35,000, , 9,533 1,32,880, , Working Notes:, , 1., , Purchase of debentures on 1.7.20X1, Interest element = 100 x 100 x 8% x 3/12 = ` 200, Investment element = (100 x 98) + [1%(100 x 98)] = ` 9,898, , 2., , Purchase of debentures on 1.1.20X2, Interest element = 50 x 100 x 8% x 3/12 = ` 100, Investment element = {(50 x 98) + [1%(50 x 98)]} – 100 = ` 4,849, , 3., , Valuation of closing balance as on 31.3.20X2:, Market value of 950 Debentures at ` 99 = ` 94,050, Cost of,  1,18,000, , 800 Debentures cost = , x80,000  =,  1,20,000, , , 100 Debentures cost =, , 9,898, , 50 Debentures cost, , 4,849, , =, , 78,667, , 93,414, Value at the end, 4., , = ` 93,414, i.e., whichever is less, , Profit on sale of debentures as on 1.10.20X1, , `, Sales price of debentures (200 x ` 100), Less: Brokerage @ 1%, , © The Institute of Chartered Accountants of India, , 20,000, , (200), , 19,800

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INVESTMENT ACCOUNTS, ,  1,18,000, , Less: Cost of Debentures , x 20,000  =,  1,20,000, , Profit on sale, 5., , 9.43, , (19,667), 133, , Loss on sale of debentures as on 1.2.20X2, , `, Sales price of debentures (200 x ` 99), Less: Brokerage @ 1%, ,  1,18,000, , Less: Cost of Debentures , x 20,000  =, 1, ,, 20, ,, 000, , , , Loss on sale, , Interest element in sale of investment = 200 x 100 xx 8% x 4/12, , © The Institute of Chartered Accountants of India, , 19,800, , (198), , 19,602, , (19,666), 64, , ` 533