Investment Accounting (AS 13) In this topic we will learn how to prepare the Investment A/c. Investment A/c.is prepared in the books of Investor. Separate Investment A/c is prepared for each and every type of Investment. This chapter deals in accounting of paper investments like Shares, Debentures, Govt. securities, Govt. Bonds etc. Accounting of Investment will be according to the provisions of AS 13. CLASSIFICATION OF INVESTMENT on the basis of Time Long term Investment (not in syllabus) Short term Investment on the basis of Income Fixed Income Investment (Fixed Interest bearing securities.) Govt. Securities Govt. Bonds Debentures, etc. Variable Income Investment (Variable Interest bearing securities) Equity shares Notes :- Cost of Investment : Investment, being an item of assets will be recorded at cost. As per normal accounting principles cost will include purchase price plus incidental expenses incurred in connection with the purchase. Cost of Investment = Purchase Price + Brokerage + Stamp duty & Registration charges. Brokerage It refers to the amount paid to share brokers for purchase / sale of shares and securities on behalf of their clients / customers. It is to be paid to them in both the cases i.e. whether the transaction is of purchase or sale. Unless otherwise stated it is to be calculated on the market price, exclusive of interest. If it is clearly stated that is payable on face value then only it should be calculated on face value. Stamp duty and registration charges refers to the legal cost incurred for transfer of names from seller to buyer in the company s register. 1
1) Fixed interest bearing securities: In case of such securities interest is received at fixed percentage on fixed due dates on the face value of securities e.g. Debentures, Govt. securities or Govt. bonds When fixed interest bearing securities are purchased or sold in the market, there are two possible types of market quotation. (1) Ex-Interest (2) Cum-Interest 1) Ex-Interest : It is the price of the security only. In addition to the quoted price, the buyer will also have to pay to the seller accrued interest from the last due date till the date of purchase /sale transaction. Cash Paid = Ex. Interest Price + Accrued Interest. 2) Cum Interest : It is the price which includes accrued interest from the last due date will the date of. purchase sale transaction. It thus represents the total cash to be paid to the seller. Ex-Interest price = Cum Interest price Accrued Interest. 2
CUM-INTEREST / EX-INTEREST QUOTATION: (1) In case of fixed income securities rate of interest & date of payments (which is usually halfyearly) is fixed. (2) The company will pay such interest (6 months) only to those persons in whose name the securities stands on the date of payment. Therefore, the company is least bothered about any purchase / sale taking place between the two dates of payment of interest. (3) Thus the company never pays interest for broken period to two or more persons. It pays 6 months interest together to only one person in whose name the securities stands on the record date. (i.e. payment date). (4) However in share market (i.e. actual practice) transactions of purchase and sale of securities takes place almost daily, irrespective of company s date of payment of interest. (5) In such cases the interest for the period, from the date of payment of last interest by the company till the date of purchase/sale will be dealt as follows : For e.g. ABC Ltd. pays interest on its 12% Debentures on 30/6 and 31/12. Mr. X buys some debentures from Mr. Y say on 1.3.2003. Mr. Y was the owner of Debentures from 1.1.2003 to 1.3.2003. (i.e.2 months) & Mr. X is the owner of Debentures from 1.3.2003 to 30.6.2003 (i.e. 4 months). Now company will pay on 30.6.2003, all 6 months interest i.e. January 03 to June 03 to Mr. X only. It will not give 2 months interest separately to Mr. Y & 4 months interest separately to Mr. X Thus Mr. X will get 6 months interest, even though he is entitled for only 4 months & he has to return those 2 months interest to Mr. Y This interest for 2 months will be settled between X & Y on the date of their transaction of purchase/sale i.e. 1/3. They will not wait till 30.6.03. In fact they may not be knowing each other as the transaction usually takes place through share brokers. Therefore, to settle this interest of 2 months, market quotations (i.e. prices) will be quoted (specified) either Cum-interest or Ex-Interest. (6) Cum-Interest means that the market quotation includes interest for the intervening period No separate interest will be paid / received as it is covered in the price. (7) Ex-Interest means that market quotation excludes interest for the intervening period. Interest will be paid / received extra in addition to the purchase / sale price. 3
Work Sheet Purchase Cum-Interest Sale Cum-Interest Mr. X purchases on 1.3.2003 Rs. 20,000/-; 12% Mr. X sells, Rs.30,000/-, 12% Debentures in Debentures in AAA Ltd. @ 107/-cum-Interest AAA Ltd. on 31.7.2003 @ Rs. 120/- Cum-Interest (a) FV Cost (a) FV SP 100 : 107 21,400 purchase price 100 : 120 36,000 Selling price 20,000 : (?) 30,000 : (?) (b) Date of Purchase : 1.3.2003 Date of Last 2 months (b) Date of Sale : 31.7.2003 Date of Last 1 month Interest Received : 31.12.2002 Interest Received : 30.6.2003 Interest = 12 x 2 x 20,000 = 400 12 1 Interest = x 100 12 100 12 (NOTE : Interest is always calculated on Face Value) x 30,000 = 300 (c) Rs. (c) Rs. Purchase price 21,400 Sale Price 36,000 (-) Interest included 400 Int. Column (-) Interest included 300 Int. Column Net purchase price 21,000 Net sale price 35,700 (+) Brokerage @ 1% 210 (-) Brokerage @ 1% 357 (+) Stamp duty & Actual Selling Price 35,343 Cost Column Registration Charges 40 (Note : Stamp duty & Registration Charges will be paid by Purchase Cost 21,250 Cost Column purchaser & not seller) Purchase Ex -Interest Mr. X purchases on 1.4.2003 Rs. 20,000/- Debentures in AAA Ltd. @ 108/-Ex-Interest (a) FV Cost 100 : 108 21,600 purchase price 20,000 : (?) Sale Ex -Interest Mr. X sells on 1.10.2003 Rs.30,000/-, 12% Debentures in AAA Ltd. @ Rs. 110/- Ex-Interest. (a) FV SP 100 : 110 33,000 Sale price 30,000 : (?) (b) Date of Purchase : 1.4.2003 Date of Last 3 months (b) Date of Sale : 01.10.2003 Date of Last 3 months Interest Received : 31.12.2002 Interest received : 30.6.2003 Interest = 12 x 3 x 20,000 = 600 Interest = 12 x 3 100 12 100 12 x 30,000 = 900 (c) Rs. Purchase price 21,600 (c) Rs. (+) Brokerage @ 1% 216 Sale Price 33,000 (+) Stamp duty & Registration Charges 40 (-) Brokerage @ 1% Net Selling Price 330 35,670 Cost Column Purchase Cost 21,856 Cost Column (+) Interest Extra 900 Int. Column (+) Interest Extra 600 Int. Column Total Money received 33,570 Total payment made 22,456 Note : For all the four cases given above face value of debentures s Rs. 100/-, Brokerage is payable e@ 1%, stamp duty / registration charged Rs. 40/-, interest payable on 30 / 6 & 31 / 12. 4
1. Purchase of Investment. Journal Entries : Investment A/c (ex-interest.) Interest A/c (accrued interest) To Cash/ Bank A/c (cum- interest) 2. Interest received on due date Cash A/c To Interest A/c Dr 3. Accured interest (O/s Intertest ) (when year ending Date of interest) end) Accured interest Dr (interest o/s at the year To Interest A/c Note :- In the begining of the nex year above entry is reversed. 4. Sale of Investment Cash / Bank A/c (cum interest) To Investment A/c (ex-interest) To Interest A/c (accrued interest) 5. Profit or Loss on sale a) If Profit Investment A/c To P&L A/c b) If Loss P&L A/c To Investment A/c 6. For Interest Income transferred Interest A/c To P&L A/c 7. For revaluing investment at year end (Valuation of closing Investment) According to (AS 13) Closing Investment should be valued at Cost or Market Price whichever is less i.e. market price < cost price 5
P&L A/c To Investment A/c Practical Hints : 1. The Investment A/c will be prepared with 3 columns on either side namely Interest column, Face value column & Cost column. 2. Investment A/c in the above journal entries refers to Cost column. 3. Interest A/c in the above journal entries refers to Interest column. 4. F.V. column is prepared to enable the calculation of interest. 5. If the quotation is not specified then it is always assumed ex-interest. 6. Profit or Loss on sale will be calculated comparing ex-interest selling price with ex-interest purchase price. 7. While calculating profit or loss on sale, ex-interest purchase price will be calculated on average cost basis. Debit side Credit side face value column. Debit side Credit side cost column. 8. If the transaction takes place on the interest date then a. If the quotation is ex-interest we consider that interest is received first & then transaction takes place. b. If the quotation is cum-interest, we consider that transaction takes place first & then interest is received. 9. When opening balance & closing balance are recorded we also record in the interest column the accrued interest from the last due date till the year ended. 10. The bal. figure in the interest column is transferred to P&L A/c. 11. Valuation of Investment is done at cost or market price, whichever is lower. If the market value is less the difference will be transferred to P&L A/c (Market price. will be given in Question. cost price is to be calculated) 6
2) Variable Interest bearing Securities : In case of such investment the return to the investment depends on the profits made by the company e.g. Equity shares Interest A/c for such securities is similar to fixed interest bearing securities with the difference that Interest column will be replaced by dividend column. Due to the nature of such securities transactions will be recorded as under: I) Purchase of shares: The entire price paid for purchase is recorded in the cost column & adjustment of dividend is done later. When dividend is received it is divided into 2 parts. 1) Pre acquisition dividend which relates to the period before we purchase the shares. It will be recorded in the cost column on Cr side. 2) Post acquisition dividend relates to the period after the shares were purchased. It will be II) III) IV) recorded in the dividend column on Cr side. Sale of shares The entire price received will be recorded in the cost column & no adjustment of dividend will be done later. However at the time of sale if it is possible to calculate the dividend amount in the total price then the dividend amount will be recorded in the dividend column and the balance amount in the cost column. At the time of sale it is possible to calculate the dividend amount if the shares are sold after declaration of dividend before it is actually received. Profit / Loss on sale of shares. It will be calculated on average cost basis Bonus shares They are free shares received from the company. No entry is passed for bonus shares received. But the number of shares received will be recorded on the debit side in the nos. column. V) Right shares They are additional shares offered for purchase by the company to the existing share holders. A shareholder can deal with the right offer as under: 1) Deny the rights in which case no entry is to be passed. 2) Subscribe to the rights which is similar to purchase of shares is recorded as Investment A/c To Cash/Bank A/c 3) Renounce the right in which case the consideration received is recorded as Cash /Bank A/c To P&L A/c However if the original shares were acquired on a cum right basis then rights renounced on such shares will be recorded as Cash /Bank. A/c 7
To Investment. A/c 8