Full Text Transcript
12
I A
NVESTMENT CCOUNTS
BASIC CONCEPTS
(cid:190) Investment Accounting is done as per Accounting Standard-13.
(cid:190) Two type of Investments :
• Long Term Investments
• Current Investments
(cid:190) Valuation of Current investment – Lower of Cost or Fair Value/net Realizable Value
(cid:190) Valuation of Long Term investment – At cost
(cid:190) Reclassification :
• From Current to Permanent → Valuation at Cost or Fair value, whichever is lower
• From Permanent to Current → Valuation at Cost or Carrying Amount, whichever is lower
(cid:190) 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.
Question 1
On 1.4.2010, Mr. Krishna Murty purchased 1,000 equity shares of Rs. 100 each in TELCO Ltd. @
Rs. 120 each from a Broker, who charged 2% brokerage. He incurred 50 paise per Rs. 100 as
cost of shares transfer stamps. On 31.1.2011 Bonus was declared in the ratio of 1 : 2. Before and
after the record date of bonus shares, the shares were quoted at Rs. 175 per share and Rs. 90 per
share respectively. On 31.3.2011 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.
(November, 2003)
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Accounting
Answer
In the books of Mr. Krishna Investment Account
for the year ended 31st March, 2011
(Scrip: Equity Shares of TELCO Ltd.)
Date Particulars Nominal Cost Date Particulars Nominal Cost
Value Value
(Rs.) (Rs.) (Rs.) (Rs.)
1.4.2010 To Bank A/c 1,00,000 1,23,000 31.3.2011 By Bank A/c 50,000 44,100
31.1.2011 To Bonus shares 50,000 − 31.3.2011 By Balance c/d 1,00,000 82,000
31.3.2011 To Profit & loss A/c − 3,100
1,50,000 1,26,100 1,50,000 1,26,100
Working Notes:
(i) Cost of equity shares purchased on 1.4.2010 = 1,000 × Rs. 120 + 2% of Rs. 1,20,000 +
½% of Rs. 1,20,000 = Rs. 1,23,000
(ii) Sale proceeds of equity shares sold on 31st March, 2011 = 500 × Rs. 90 – 2% of Rs.
45,000 = Rs. 44,100.
(iii) Profit on sale of bonus shares on 31st March, 2011
= Sales proceeds – Average cost
Sales proceeds = Rs. 44,100
Average cost = Rs. (1,23,000 × 50,000)/1,50,000
= Rs. 41,000
Profit = Rs. 44,100 – Rs. 41,000 = Rs. 3,100.
(iv) Valuation of equity shares on 31st March, 2011
Cost = (Rs. 1,23,000 × 1,00,000)/1,50,000 = Rs. 82,000)
Market Value = 1,000 shares × Rs. 90 = Rs. 90,000
Closing balance has been valued at Rs. 82,000 being lower than the market value.
Question 2
On 1st April, 2009, XY Ltd. has 15,000 equity shares of ABC Ltd. at a book value of ` 15 per
share (face value ` 10 per share). On 1st June, 2009, XY Ltd. acquired 5,000 equity shares of
ABC Ltd. for ` 1,00,000 on cum right basis. 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
2009.
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Investment Accounts
(2) Right shares are to be issued to the existing shareholders on 1st September 2009. 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 31.3.2009 were declared by ABC Ltd. @ 20%, which was
received by XY Ltd. on 31st October 2009.
XY Ltd.
(i) Took up half the right issue.
(ii) Sold the remaining rights for ` 8 per share.
(iii) Sold half of its share holdings on 1st January 2010 at ` 16.50 per share. Brokerage being
1%.
You are required to prepare Investment account of XY Ltd. for the year ended 31st March 2010
assuming the shares are being valued at average cost. (November, 2010)
Answer
In the books of XY Ltd.
Investment in equity shares of ABC Ltd.
for the year ended 31st March, 2010
Date Particulars No. Income Amount Date Particulars No. Income Amount
` ` ` `
2009 To Balance b/d 15,000 - 2,25,000 2009 By Bank A/c - - 16,000
April 1 Sept. 1 (W.N 3)
June 1 To Bank A/c 5,000 -- 1,00,000 2009 By Bank - 30,000 10,000
Oct. 31 A/c
(W.N. 5)
July 1 To Bonus 4,000 - - 2010 By Bank A/c 13,000 - 2,12,355
Issue Jan. 1 (W.N.4)
(W.N. 1)
Sept.1 To Bank A/c 2,000 - 24,000 March By Balance 13,000 - 1,61,500
(W.N. 2) 31 c/d
(W.N. 6)
2010 To P & L A/c - - 50,855
March (W.N. 4)
31
“ To P & L A/c - 30,000 -
26,000 30,000 3,99,855 26,000 30,000 3,99,855
Working Notes:
1. Calculation of no. of bonus shares issued
15,000 shares+5,000 shares
Bonus Shares = x 1= 4,000 shares
5
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12.3
Accounting
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
(Since shares are purchased cum right basis, therefore, amount received from sale
of rights will be credited to investment a/c)
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 –` 16,000 – ` 10,000
= ` 3,23,000
Average cost of 13,000 shares would be
3,23,000
= ×13,000 = ` 1,61,500
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 (1,61,500)
Profit on sale 50,855
© The Institute of Chartered Accountants of India
12.4
Investment Accounts
5. Dividend received on investment held as on 1st April, 2009
= 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, 2009
= 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, 2009 and dividend pertains to the year ended
31.3.2009.
6. Calculation of closing value of shares (on average basis) as on
31st March, 2010
3,23,000
13,000× = ` 1,61,500.
26,000
Closing value of shares would be ` 1,61,500.
Question 3
The following information is presented by Mr. Z, relating to his holding in 9% Central
Government Bonds.
Opening balance (face value) Rs.1,20,000, Cost Rs.1,18,000 (Face value of each unit is
Rs.100).
1.3.2008 Purchased 200 units, ex-interest at Rs.98.
1.7.2008 Sold 500 units, ex-interest out of original holding at Rs.100.
1.10.2008 Purchased 150 units at Rs.98, cum interest.
1.11.2008 Sold 300 units, ex-interest at Rs.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. (June, 2009)
Answer
9% Central Government Bonds (Investment) Account
Particulars Face Interest Principal Particulars Face Interest Principal
Value Value
2008 Rs. Rs. Rs. 2008 Rs. Rs. Rs.
Jan.1 To Balance March By Bank
b/d 1,20,000 2,700 1,18,000 31 A/c - 6,300 -
March To Bank July 1 By Bank
© The Institute of Chartered Accountants of India
12.5
Accounting
1 A/c 20,000 750 19,600 A/c 50,000 1,125 50,000
July 1 To P&L A/c - - 833 Sept. By Bank
30 A/c - 4,050 -
Oct. 1 To Bank Nov. By Bank
A/c 15,000 - 14,700 1 A/c 30,000 225 29,700
Nov. To P&L A/c - - 200 Dec. By Balance
1 31 c/d 75,000 1,688 73,633
Dec. To P&L A/c
31 (Transfer) 9,938
1,55,000 13,388 1,53,333 1,55,000 13,388 1,53,333
Working Note:
Calculation of closing balance: Units Rs.
Bonds in hand remained in hand at 31st December 2008
From original holding (1,20,000 – 50,000 – 30,000)= 40,000 1,18,000 39,333
×40,000=
1,20,000
Purchased on 1st March 20,000 19,600
Purchased on 1st October 15,000 14,700
75,000 73,633
Question 4
Mr. Purohit furnishes the following details relating to his holding in 8% Debentures (Rs.100
each) of P Ltd., held as Current assets:
1.4.2009 Opening balance – Face value Rs.1,20,000, Cost Rs.1,18,000
1.7.2009 100 Debentures purchased ex-interest at Rs.98
1.10.2009 Sold 200 Debentures ex-interest at Rs.100
1.1.2010 Purchased 50 Debentures at Rs.98 cum-interest
1.2.2010 Sold 200 Debentures ex-interest at Rs.99
Due dates of interest are 30th September and 31st March.
Mr. Purohit closes his books on 31.3.2010. 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 31.3.2010 is Rs.99. (May, 2010)
© The Institute of Chartered Accountants of India
12.6
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© The Institute of Chartered Accountants of India
Accounting
Working Notes:
1. Valuation of closing balance as on 31.3.2010:
Market value of 950 Debentures at Rs. 99 = Rs. 94,050
Cost price of
⎛1,18,000 ⎞
⎜ x80,000⎟=8
⎝1,20,000 ⎠
800 Debentures cost =8 78,667
100 Debentures cost = 9,898
50 Debentures Cost = 4,849
93,414
Value at the end = Rs. 93,414 i.e whichever is less
2. Profit on sale of debentures as on 1.10.2009
Rs.
Sales price of debentures (200 x Rs.100) 20,000
Less: Brokerage @ 1% 200
19,800
⎛1,18,000 ⎞
Less: Cost price of Debentures ⎜ x20,000⎟= 19,667
⎝1,20,000 ⎠
Profit on sale 133
3. Loss on sale of debentures as on 1.2.2010
Rs.
Sales price of debentures (200 x Rs.99) 19,800
Less: Brokerage @ 1% 198
19,602
⎛1,18,000 ⎞
Less: Cost price of Debentures ⎜ x20,000⎟= 19,666
⎝1,20,000 ⎠
Loss on sale 64
EXERCISES
1. On 1.4.96, Sundar had 25,000 equity shares of ‘X’ Ltd.at a book value of Rs. 15 per share (Face value Rs.10).
On 20.6.96, he purchased another 5,000 shares of the company at Rs. 16 per share. The directors of ‘X’Ltd.
© The Institute of Chartered Accountants of India
Investment Accounts
announced a bonus and rights issue. No dividend was payable on these issues. The tems of the issue are as
follows:
Bonus basis 1:6 (Date 16.8.96).
Rights basis 3:7 (Date 31.8.96) Price Rs. 15 per share.
Due date for payment 30.9.96.
Shareholders can transfer their rights in full or in part. Accordingly, Sundar sold 33.33% of his entitlement to
Sekhar for a consideration of Rs. 2 per share.
Dividends: Dividends for the year ended 31.3.96 at the rate of 20% were declared by X Ltd. and received by
Sundar on 31.10.96. Dividends for shares acquired by him on 20.6.96 are to be adjusted against the cost of
purchase.
On 15.11.96, Sundar sold 25,000 equity shares at a premium of Rs. 5 per share.
You are required to prepare in the books of Sundar.
(1) Investment Account
(2) Profit & Loss Account.
For your exercise, assume that the books are closed on 31.12.96 and shares are valued at average cost.
(Hints: Profit on sale of investment Rs.50,000)
© The Institute of Chartered Accountants of India
12.9