INVESTMENT ACCOUNTS

THEORY
From accounting point of view, investments can be classified as:-
1. Investment in Fixed Income Bearing Securities
2. Investment in variable Income Bearing Securities.

1) Fixed Income Bearing Securities :-

It consists of investments in debentures, govt. securities, govt. bonds, etc. Interest
in respect of such type of securities will be paid at a fixed rate and on a fixed date.
Whenever transactions of purchase and sale of such type of securities are frequent, it is
essential to prepare investment A/c in the books of investor. This A/c shall be prepared
with 3 columns (i.e Face value, Interest and Cost)

Accounting treatment and Journal entries:

1) For Interest:
a) For receipt of Interest Bank A/c...........Dr.
To Interest A/c
b) For accrued interest at the end of the year. Accrued Interest A/c... Dr.
To Interest A/c
c) For accrued interest at the beginning of Interest A/c...Dr.
the year. To Accrued Interest A/c
d) For the transfer of balance in interest A/c Interest A/c...Dr.
To P&L A/c

2) For Purchase of Investments:

Investments A/c...Dr.
Interest A/c...Dr.
To Bank A/c
[Note: Purchase cost will include brokerage paid, transfer fees, Stamp duty, etc.]

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3) For Sale of Investments:
Bank A/c...Dr.
To Investments A/c
To Interest A/c.
[Note : If brokerage is paid then the brokerage should be deducted from gross sales
value and only Net Sales value should be recorded.]

4) For Profit/Loss on Sale:

a) If profit Investments A/c...Dr.
To P&L A/c
b) If loss P&L A/c...Dr.
To Investments A/c
[Note: Profit or Loss on sale can be calculated by comparing Net Sales Value with cost.
In the absence of information, cost shall be ascertained on Average Cost Basis (As per
AS.13)]

Valuation of Investments at year end:

At year end, investment shall be valued at cost or market price whichever is lower. In the
absence of information, cost shall be ascertained on average cost basis. If market price is
lower than cost, then the difference will be called as loss on valuation and shall be written
off by passing the following entry:

Profit & Loss A/c...Dr.

To Investment A/c

Cum-Interest Price and Ex-Interest Price:

Whenever fixed income bearing securities are purchased or sold, buyer apart from paying
normal market price should compensate the seller for the interest from the last interest
paying date till the date of transaction. In other words, seller is entitled for the interest for
the period for which he holds investments.

Whenever such interest is included in the market price. Such a market price is called as Cum-
Interest Price. Whenever transaction is at Cum-Interest price, we should analyse the price
into interest and cost and only then it should be recorded in Investment A/c.

47 INVESTMENT ACCOUNTS
Whenever interest is not included in the market price. Then such type of price is called as Ex-
Interest price. In this case No analysis is required. We can directly record cost in Investment
A/c.

Conversion of Debenture into Equity shares:

Whenever Debentures are converted into Equity shares. We should follow the following
points:
i. Interest shall be received on face value of debentures converted from last interest
paying date till the date conversion. We should pass the following entry:

Bank A/c.....Dr.
To Interest A/c

ii. For conversion of Debentures into Equity shares, following entry should be passed:

Investment in Equity shares A/c...Dr.

To Investment in Debentures A/c.
[At cost of Debentures converted.]
[Note: There would be no profit/ loss at the time of conversion.]

Variable Income Bearing Securities: (Important Points)

1) Bonus Shares: These are free shares issued by the company to the shareholder. Whenever
investor receives Bonus shares, no accounting entry is passed. We should record only
number of bonus shares received in the number column without recording the cost in
the cost column. Receipt of bonus shares reduces Average cost per share.

2) Right Shares: When company offers for subscription additional shares to existing
shareholders. Then it is called as Right Shares. Shareholders has following three options:
a. Reject the offer-No Accounting Treatment.
b. Accept the offer-In this case normal accounting entry for purchase of shares has to
be passed.
c. Renounce (Transfer) of Rights in favour of third party (sale of Rights)-Whenever
Right entitlements are transferred, the consideration received on sale of rights
should be treated as Revenue Receipt provided we have no information about

INVESTMENT ACCOUNTS 48
 Cum-Right price and Ex-Right price. Amount treated as Revenue Receipt shall be
recorded on the credit side of the Income column and would be finally transferred
to Profit and Loss A/c (as required by AS.13)

3) Dividends: Dividends are declared by the company in Annual General meeting and are
received by those shareholders who have purchased the shares before Annual General
meeting and whose names appear in the register of Shareholders. Whenever investor
receives dividend we should analyse it as Capital receipt and Revenue Receipt For the
purpose of our analysis we should compare date of purchase of shares with period for
which dividend is declared.
a. If date of purchase of shares is prior(before) the period for which dividend is
declared then the entire dividend received shall be treated as Revenue Receipt.
b. lf date of purchase of shares is after the period for which dividend is declared then
entire dividend received shall be treated as Capital Receipt.
c. If date of purchase of shares falls within the period for which dividend is declared
then the dividend received shall be classified as Partly Capital Receipt and Partly
Revenue Receipt proportionately on time basis.

Amount treated as Capital Receipt shall be recorded on the credit side of Investment A/c in
the cost column.

Profit and Loss on sale and valuation of Investment at year end:

Profit/ Loss on sale of Investments shall be calculated by comparing Net Sales Vale with cost.
In the absence of information Cost shall be ascertained on Average cost basis. At the year end
invests shall be valued at cost or Market price
whichever is lower.

Average Cost per share =Total Cost - Capital Receipt (if any)/ Total Quantity

Cum Right Price & Ex. Right Price:

Whenever we have information about Cum. Right price and Ex. Right price, the following 2
possibilities will occurs.

1) If Ex. Right price is equal or more than cum right price

49 INVESTMENT ACCOUNTS
 In that case entire consideration received on renounce of rights shall be treated as
revenue receipt.

2) If Ex. right price is less than Cum Right price

In this case the consideration received on transfers of right shall be treated as capital
receipt to the extent of difference between cum Right price and Ex.-right price of the
original lot and the balance of any shall be treated as revenue receipt.

INVESTMENT ACCOUNTS 50
 CLASS WORK
Question 1
Mr. A has made investment in 12% Debentures of X Ltd. (Interest dates March 31 and September
30). From the following details prepare Investment account in the books of Mr. A for the year
2012.
1.1.2012 Purchased 300 Debentures @ 96 Ex - interest
1.3.2012 Purchased 200 Debentures @ 99 Cum - interest
1.8.2012 Sold 100 Debentures @ 98 Ex - interest
1.12.2012 Purchased 200 Debentures @ 97.

Question 2
Calcutta Investments hold 400, 12% Debentures of ₹100 each in Acme Ltd. as on 1st April,
2010 at a cost of ₹50,000. Interest is payable on 30th June and 31st December each year. On
1st June, 2010, 200 debentures are purchased cum interest at ₹21,400. On 1st November,
2010, 200 debentures are purchased ex-interest at ₹19,200. On 31st December, 2010, 300
debentures are sold cum-interest for ₹32,250.
Prepare Investment account valuing closing stock as on 31st March, 2011 at cost or market
price whichever is lower. The debentures were quoted at ₹98 on 31st March, 2011.

Question 3
A purchased on 1st March, 2011 ₹ 24,000 5% Bharat Debenture Stock at 90 cum-interest,
being payable on 31st March and 30th September each year. Stamp and expenses on purchase
amounted to ₹20 and brokerage at 2% was charged. Interest for the half year was received
on the due date. On 1st September, ₹10,000 of the stock was sold at 92 ex-interest less
brokerage at 2%. On 30th September, ₹8,000 stock was purchased at 91 ex-interest plus
brokerage at 2% and charges ₹10. On 1st December, ₹6,000 stock was sold at 94 cum interest
less brokerage 2%. The market price of stock on 31st December was ₹92. Show the Investment
Account for the year ended 31st December, making all calculation in months.

Question 4
Bharat Finance Ltd. purchased on 1st May, 2010 13.5% convertible debentures in Glance Ltd.
of the face value of₹1,00,000 @ 105. Interest on debentures is payable each year on 31st
March and 30th September. The following were the other transactions with regard to these
debentures carried by Bharat Finance Ltd. in 2010.

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 Aug.1 Purchased₹50,000 Debentures @ 107 cum-interest.
Oct. 31 Sold ₹40,000 Debentures @ 103
Nov. 30 Receipt of 2,200 Equity Shares in Glance Ltd. of₹ 10 each in conversion
of 20% of the Debentures held.
Dec.15 Purchased 1000 Equity Shares in Glance Ltd. @ ₹ 16.
The market value of the Debentures and Equity Shares in Glance Ltd. at the end of 2010 was
respectively 96 and ₹15.
The accounting year of the Bharat Ltd. is the Calendar year. Prepare Investment Accounts in
the books of Bharat Ltd. on Weighted Average Cost Basis.

Question 5
On 1.1.2010, sunder had 25,000 equity shares of “X” Ltd. a book value of ₹15 per share
(Purchased on 1.10.2009). On 20.6.2010, he purchased another 5,000 shares of the company
at ₹16 per share. The directors of “X” Ltd. announced a bonus and right issue. The terms of
the issue are as follows:
Bonus basis 1 : 6 (Date 16.8.2010)
Rights basis 3 : 7 (Date 31.8.2010)
Price ₹15 per share.
Due date for payment 30.9.2010.
Shareholders can transfer their rights in full or in part. Accordingly Sundar Sold 33-1/3% of his
entitlement to Shekhar for a consideration of ₹2 per share.
Dividends: Dividends for the year ended 31.3.2010 at the rate of 20% were declared by X Ltd.
and received by Sundar on 31.10.2010.
On 15.11.2010, Sunder sold 25,000 equity shares at a premium of ₹5 per share.
You are required to prepare Investment Account.
For your exercise, assume that the books are closed on 31.12.2010 and shares are valued at
average cost.

Question 6
Smart Investments made the following investments in the year 2013-14:
12% State Government Bonds having face value ₹ 100
Date Particulars
01/04/2013 Opening Balance (1200 bonds) book value of ₹ 1,26,000
02/05/2013 Purchased 2,000 bonds @ ₹ 100 cum interest
30/09/2013 Sold 1,500 bonds at ₹ 105 ex interest

INVESTMENT ACCOUNTS 52
Interest on the bonds is received on 30th June and 31st December each year.
Equity shares of X Ltd.
Date Particulars
15/04/2013 Purchased 5,000 equity shares @ ₹ 200 on cum right basis Brokerage of 1%
was paid in addition (Face Value of shares ₹ 10)
03/06/2013 The company announced a bonus issue of 2 shares for every 5 shares held.
16/08/2013 The company made a rights issue of 1 share for every 7 shares held at ₹
250 per share
The entire money was payable by 31/08/2013
22/08/2013 A right to the extent of 20% was sold @ ₹ 60. The remaining rights were
subscribed.
02/09/2013 Dividend @ 15% for the year ended 31-03-2013 was received on 16.09.2013
15/12/2013 Sold 3,000 shares @ ₹ 300. Brokerage of 1 % was incurred extra
15/01/2014 Received interim dividend @ 10% for the year 2013-14
31/03/2014 The shares were quoted in the stock exchange @ ₹ 220

Prepare Investment Accounts in the books of Smart Investments. Assume that the average
cost method is followed.

Question 7
Mr. Harsh provides the following details relating to his holding in 10% debentures (face value
of ₹ 100 each) of Exe Ltd. held as current assets:

1.4.2018 opening balance - 12,500 debentures, cost ₹ 12,25,000

1.6.2018 purchased 9,000 debentures@ ₹ 98 each ex-interest
1.11.2018 purchased 12,000 debentures @ ₹ 115 each cum interest
31.1.2019 sold 13,500 debentures@ ₹ 110 each cum-interest
31.3.2019 Market value of debentures @ ₹ 115 each

Due dates of interest are 30th June and 31st December.

Brokerage at 1% is to be paid for each transaction. Mr. Harsh closes his books on 31.3.2019.
Show investment account as it would appear in his books assuming FIFO method is followed.

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 HOME WORK
Question 1
In 2011, 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, 2012, 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, 2013 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, 2012 to 1st March, 2013.

Question 2
On 1st January 2011, 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 2011, Singh purchased 5,000
more equity shares in the company at a premium of ₹ 4 per share.
On 30th June, 2011, 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, 2011.
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.

INVESTMENT ACCOUNTS 54
Question 3
Mr. Brown has made following transactions during the financial year 20X1-X2:
Date Particulars
01.05.2011 Purchased 24,000 12% Bonds of ₹ 100 each at ₹ 84 cum-interest. Interest is
payable on 30th September and 31st March every year.
15.06.2011 Purchased 1,50,000 equity shares of ₹10 each in Alpha Limited for ₹25 each
through a broker, who charged brokerage @ 2%.
10.07.2011 Purchased 60,000 equity shares of ₹10 each in Beeta Limited for ₹44 each
through a broker, who charged brokerage @ 2%.
14.10.2011 Alpha Limited made a bonus issue of two shares for every three shares held.
31.10.2011 Sold 80,000 shares in Alpha Limited for ₹ 22 each.
01.01.2012 Received 15% interim dividend on equity shares of Alpha Limited.
15.01.2012 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.
01.03.2012 Sold 15,000 12% Bonds at ₹90 ex-interest.
15.03.2012 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,
2012.

Question 4
Mr. Purohit furnishes the following details relating to his holding in 8% Debentures (₹ 100
each) of P Ltd., held as Current assets:
1.4.2011 Opening balance – Nominal value ₹ 1, 20,000, Cost ₹ 1, 18,000
1.7.2011 100 Debentures purchased ex-interest at ₹ 98
1.10.2011 Sold 200 Debentures ex-interest at ₹ 100
1.1.2012 Purchased 50 Debentures at ₹ 98 Ex-interest
1.2.2012 Sold 200 Debentures ex-interest at ₹ 99

Due dates of interest are 30th September and 31st March.

Mr. Purohit closes his books on 31.3.2012. 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 31.3.2012 is ₹ 99.

55 INVESTMENT ACCOUNTS
Question 5
A Ltd. purchased on 1stApril, 2015 8% convertible debenture in C Ltd. of face value of ₹
2,00,000 @ ₹ 108. On 1stJuly, 2015 A Ltd. purchased another ₹ 1,00,000 debenture @ ₹ 112
cum interest. On 1stOctober, 2015 ₹ 80,000 debenture was sold @ ₹ 105. On 1stDecember,
2015, C Ltd. gives option for convention of 8% convertible debentures into equity share of
₹10 each. A Ltd. receive 5000 equity share in C Ltd. in conversion of 25% debenture held on
that date. The market price of debenture and equity share in C Ltd. at the end of year 2015
is ₹110 and ₹15 respectively.
Interest on debenture is payable each year on 31stMarch, and 30thSeptember.
The accounting year of A Ltd. is calendar year.
Prepare investment account in the books of A Ltd. on average cost basis.
(May 2016 IPCC)

Question 6
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.

Question 7
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 follows FIFO method.

INVESTMENT ACCOUNTS 56