Notes To Investment Accounting
Notes To Investment Accounting
Notes To Investment Accounting
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 transfer value on reclassification of
investments
Investments
Current Long-term
Classification
investments investments
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.
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.
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:
If rights are not subscribed for but are sold in the market, the sale
proceeds are taken to the statement of profit and loss.
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 ex-
right 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,
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.
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
for the period from 1 December 20X2 to 1st March, 20X3
st
Date Particulars Nominal Interest Cost Date Particulars Nominal Interest Cost
Value (` ) Value (` )
(` ) (` )
1.12.20X2 ToBank 10,00,000 20,000 10,00,100 1.03.20X By Bank A/c 10,00,000 50,000 9,99,400
A/c 3 (W.N.2)
(W.N.1)
1.3.20X3 ToProfit & - 1.3.20X3 By Profit &
loss A/c* 30,000 loss A/c 700
(b.f.) (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) = 10,10,000
Add: Brokerage (1% of ` 10,10,000) = 10,100
Less: Cum Interest (10,000 x 100 x12% x 2/12) = (20,000)
Total = 10,00,100
2. Sale proceeds of 12% debentures sold `
Sales Price (10,000 × ` 106) = 10,60,000
Less: Brokerage (1% of ` 10,60,000) = (10,600)
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.
Working Notes:
1. Bonus shares do not have any cost.
2. Profit on sale of bonus shares = Sales proceeds – Average cost
Sales proceeds = ` 45,000
500
Average cost = × 62,500 = ` 31,250
1,000
Profit = ` 45,000 – `31,250 = ` 13,750.
3. Valuation of Closing Balance of Shares at the end of year
The total cost of 1,000 share including bonus is `62,500
500
Therefore, cost of 500 shares (carried forward) is × 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 Particulars Nominal Cost Date Particulars Nominal Cost
Value Value
(` ) (` ) (` ) (` )
1.4.20X1 To Bank A/c 5,00,000 6,15,000 31.3.20X2 By Bank A/c 2,50,000 2,20,500
(W.N.1) (W.N.2)
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
Average cost = ` (6,15,000 /7,50,000) x 2,50,000 = ` 2,05,000
Profit = ` 2,20,500 – ` 2,05,000= ` 15,500.
4. 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
Working Notes:
50,000 + 10,000
(1) Bonus shares = = 10,000 shares
6
50,000 + 10,000 + 10,000
(2) Right shares = × 3 = 30,000 shares
7
1
(3) Sale of rights = 30,000 shares× × ` 2= ` 20,000 to be credited to
3
statement of profit and loss
2
(4) Rights subscribed = 30,000 shares × × ` 15 = ` 3,00,000
3
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. Amount
` `
1.4.20X1 To Bal b/d 25,000 3,75,000 31.10.20X1 By Bank — 10,000
20.6.20X1 To Bank 5,000 80,000 (dividend
16.8.20X1 To Bonus 5,000 — on shares
(W.N.1) acquired
30.9.20X1 To Bank 10,000 1,50,000 on
(Rights 20/6/20X1)
Shares) (W.N.4)
(W.N.3)
Working Notes:
( 25,000+5,000 )
(1) Bonus Shares = = 5,000 shares
6
Average cost =
(3,75,000+80,000+1,50,000 -10,000 ) ×25,000 = ` 3,30,556
45,000
Profit = ` 3,75,000– ` 3,30,556= `44,444.
(dividend)
[20,000 x
10 x 15%]
[5,000 x 10
x 15%]
June 1 To Bank 5,000 - 70,000 Nov. 1 By Bank 20,000 2,60,000
Aug. 2 To Bonus 5,000 — Nov. 1 By P & L 1,429
Issue A/c (W.N.2)
Sep. 30 To Bank 5,000 - 75,000 Dec. 31 By Balance 15,000 1,96,071
(Right)
(W.N.1)
Nov. 1 To Profit 30,000 c/d (W.N.3)
& Loss
A/c
(Dividend
income)
35,000 30,000 4,65,000 35,000 30,000 4,65,000
Jan. 1, To 15,000 1,96,071
20X2 Balance
b/d
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) 4,65,000
Less: Dividend on shares purchased on June 1 (since the dividend (7,500)
pertains to the year ended 31st March, 20x1, i.e., the pre-acquisition
period)
Cost of 35,000 shares 4,57,500
(W.N.1) (12,00,000 x
8% x 6/12)
1.10.20X1 To Profit & 1.10.20X1 By Bank A/c
Loss A/c (W.N (W.N 2) 3,00,000 10,000 2,43,000
6) 11,500
1.11.20X1 By Bank A/c
31.3.20X2 To Profit & 84,000 (W.N 3) - 36,000 -
Loss A/c
31.3.20X2 By Balance
c/d (W.N.4) 9,00,000 30,000 6,94,500
12,00,000 1,24,000 9,37,500 12,00,000 1,24,000 9,37,500
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.
Date Particulars
01.04.20X1 Opening Balance (1200 bonds) book value of ` 126,000
02.05.20X1 Purchased 2,000 bonds @ ` 100 cum interest
30.09.20X1 Sold 1,500 bonds at ` 105 ex interest
Interest on the bonds is received on 30th June and 31st Dec. each year.
Working Notes:
1. Profit on sale of bonds on 30.9.X1
= Sales proceeds – Average cost
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
2. Valuation of bonds on 31st March, 20X2
Cost = `3,18,000/3,200 x1,700 = 1,68,937.50
3. 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.
Solution
In the books of Mr. Brown
12% Bonds for the year ended 31st March, 20X2
Date Particulars No. Income Amount Date Particulars No. Income Amount
` ` ` `
Investment in Equity shares of Alpha Ltd. for the year ended 31st March, 20X2
Date Particulars No. Income Amount Date Particulars No. Income Amount
` ` ` `
20X1 To Bank A/c 1,50,000 -- 38,25,000 20X1 By Bank A/c 80,000 - 17,60,000
June ([1,50,000 x Oct. 31
15 25] + [2% x
(1,50,000 x
25)])
Oct. 14 To Bonus 1,00,000 - - 20X2 By Bank A/c 2,55,000
Issue Jan. 1 –dividend
(1,50,000/3 (1,70,000 x
x2) 10 x 15%)
20X1 To P & L A/c 5,36,000 March By Balance 1,70,000 - 26,01,000
Oct. 31 (W.N.3) 31 c/d
(W.N.4)
Investment in Equity shares of Beeta Ltd. for the year ended 31st March, 20X2
Date Particulars No. Income Amount Date Particulars No. Income Amount
` ` ` `
20X1 To Bank A/c 60,000 -- 26,92,800 20X2 By Bank – - 1,18,800
July ([60,000 x 44] Mar. dividend
10 + [2% x 15 [(60,000 +
(60,000 x 44)]) 6,000) x 10
x 18%]
20X2 To Bank A/c 6,000 - 30,000 March By Balance
Jan. (W.N. 5) 31 c/d
15 (bal. fig.) 66,000 - 27,22,800
March To P & L A/c
31 - 1,18,800 -
Working Notes:
1. Profit on sale of 12% Bond
Sales price ` 13,50,000
19,92,000
Less: Cost of bond sold = x 15,000 (` 12,45,000)
24,000
Profit on sale ` 1,05,000
2. 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 ` 17,60,000
38,25,000
Less: Cost of bond sold = x 80,000 (` 12,24,000)
2,50,000
Profit on sale ` 5,36,000
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 Particulars No. Dividend Amount
` ` ` `
20X1 20X1
April 1 To Bank A/c 5,000 - 5,35,500 May 15 By Bank A/c - - 10,000
(W.N.1) (dividend)
(W.N.6)
June 30 To Bonus 1,000 - -
Issue (W.N 2)
Oct. 1 To Bank A/c 250 - 11,250 Nov. 30 By Bank A/c - 6,000 -
(W.N. 3) (Interim
dividend)
(W.N.7)
Dec.31 To P & L A/c - - 21,660 Dec. 31 By Bank A/c 3,000 - 2,79,300
(W.N. 5) (W.N.5)
20X2 20X2
March 31 To P & L A/c - 6,000 - March 31 By Balance
(b.f.) c/d
(W.N. 7) 3,250 - 2,79,110
6,250 6,000 5,68,410 6,250 6,000 5,68,410
Working Notes:
1. 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. Calculation of number of bonus shares issued
5,000
Bonus Shares = ×1=1,000
5
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
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
• 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.
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) 7. (b) 8. (c) 9. (b) 10. (c)
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 Date Particulars No. Income Amount
` ` ` `
20X1 To Balance b/d 15,000 - 2,25,000 20X1 Oct. By Bank - 30,000 10,000
April 1 31 A/c
(W.N. 5)
June 1 To Bank A/c 5,000 -- 1,00,000 20X2 By Bank A/c 13,000 - 2,12,355
Jan. 1 (W.N.4)
July 1 To Bonus Issue 4,000 - - March By Balance c/d 13,000 - 1,69,500
(W.N. 1) 31 (W.N. 6)
Sept.1 To Bank A/c 2,000 - 24,000
(W.N. 2)
20X2 To P & L A/c - - 42,855
Jan 1 (W.N. 4)
“20X2 To P & L A/c - 30,000 -
March 31
Working Notes:
1. Calculation of no. of bonus shares issued
15,000 shares+5,000 shares
Bonus Shares = x 1= 4,000 shares
5
2. Calculation of right shares subscribed
15,000 shares+5,000 shares+4,000 shares
Right Shares = = 4,000 shares
6
4,000
Shares subscribed by XY Ltd. = = 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
`
Sale proceeds of 13,000 shares (13,000 x `16.50) 2,14,500
Less: 1% Brokerage (2,145)
2,12,355
Less: Cost of 13,000 shares (1,69,500)
Profit on sale 42,855
5. Dividend received on investment held as on 1st April, 20X1
= 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
Note: 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.
6. Calculation of closing value of shares (on average basis) as on
31st March, 20X2
3,39,000
13,000× = ` 1,69,500
26,000
Answer 2
In the Books of Mr. Z
9% Central Government Bonds (Investment) Account
Particulars Nominal Interest Principal Particulars Nominal Interest Principal
Value Value
20X1 ` ` ` 20X1 ` ` `
Jan.1 To Balance March By Bank
b/d 1,20,000 2,700 1,18,000 31 A/c - 6,300 -
(W.N.1) (W.N.3)
March To Bank July 1 By Bank
1 A/c 20,000 750 19,600 A/c 50,000 1,125 50,000
(W.N.2) (W.N.4)
July 1 To P&L - - 833 Sept. By Bank
A/c 30 A/c - 4,050 -
(W.N.5) (W.N.6)
Oct. 1 To Bank Nov. By Bank
A/c 15,000 - 14,700 1 A/c 30,000 225 29,700
(150 x 98) (W.N.7)
Nov. To P&L - - 200 Dec. By
1 A/c 31 Balance 75,000 1,688 73,633
(W.N.8) c/d
(W.N. 9 &
W.N.10)
Dec. To P&L
31 A/c (b.f.) 9,938
(Transfer)
1,55,000 13,388 1,53,333 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
Date Particulars Nominal Interest Cost Date Particulars Nominal Interest Cost
Value Value
` ` ` `
1.7.20X1 To Bank (ex- 10,000 200 9,898 1.10.20X1 By Bank 20,000 - 19,800
Interest) (W.N.1) (W.N.4)
1.10.20X1 To Profit & Loss 133 1.2.20X2 By Bank (ex- 20,000 533 19,602
A/c (W.N.4) Interest)
(W.N.5)
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 = 78,667
1,20,000
100 Debentures cost = 9,898
50 Debentures cost = 4,849
93,414
Value at the end = ` 93,414, i.e., whichever is less
4. Profit on sale of debentures as on 1.10.20X1
`
Sales price of debentures (200 x ` 100) 20,000
Less: Brokerage @ 1% (200)
19,800
1,18,000
Less: Cost of Debentures x 20,000 = (19,667)
1,20,000
Profit on sale 133
5. Loss on sale of debentures as on 1.2.20X2
`
Sales price of debentures (200 x ` 99) 19,800
Less: Brokerage @ 1% (198)
19,602
1,18,000
Less: Cost of Debentures x 20,000 = (19,666)
1,20,000
Loss on sale 64
Interest element in sale of investment = 200 x 100 xx 8% x 4/12 ` 533