PAPER 1 ACCOUNTING
CHAPTER 12
INVESTMENT ACCOUNTS
PROF – RAHUL J. MALKAN
INTRODUCTION
Investments are assets held by an enterprise
1. For earning income by the way of dividend,
interest and rentals
2. For capital appreciation, or
3. For other benefits to the investing enterprise.
Investment Accounting is done as
per AS – 13
Classification of Investments
As per AS – 13 investment are classified
into two categories
Long Term
Investment
Current Investments
A current Investments is an investment that are
intended to be held for not more than one year
from the date of investment
Current Investments
The carrying amount should be lower of cost and
fair value
Market Value is the amount obtainable from sale of
Investments in an open market, net of expenses
Under appropriate circumstances, market value or
reliable value provides an evidence of fair value
Fair Value is the amount for which an asset could be
exchanged between knowledgeable buyer and
Seller
Long Term Investments
Investment other than current investments are long
term investments
Long Term Investment
They are usually carried at cost
If there is permanent decline in value of investment,
the carrying amount is reduced to recognise the
decline
The Decline is charged to Profit and Loss A/c
The reduction in carrying amount is reversed when
there is a rise in the value of the investment.
Investment Accounting
A Separate Investment Account should be made for
each scrip purchased. The scrips purchased may be
broadly divided into two categories.
Fixed Income Bearing Scrips
Variable Income Bearing Scrips
Fixed Interest Bearing Securities
Interest in government securities or debentures
comes under this category
Dr
Date Investment Account Particulars W.N
Face
Interest Cost Date Cr
Particulars Value
Total W.N Face
Interest Cost Value
Total Cost of investment includes acquisition charges such as
brokerage, fees and duties.
Fixed Interest Bearing Securities
Purchase
• Ex – Interest
• Cum – Interest
Sale
• Ex – Interest
• Cum – Interest
Purchase Ex Interest
Ex – Interest price is the quotation which does not
include the interest. Interest have to be paid
separately.
Journal Entry
Investment A/c . . . Dr (Ex – Interest)
Interest A/c . . . . . Dr (Interest)
To Bank A/c
(Cum – Interest)
Note : If brokerage is paid it should be Added
Purchase Ex Interest
Example
1.7.2012 100, 8% debentures purchased ex-interest
at ₹ 98. Brokerage at 1% is to be paid. Dates of
interest payment is 31st March and 30th Oct.
Ex – Interest price = 100 X 98 = 9800 + 1% = 9898
Interest = 100 x 100 x 8% x 3/12 = 200
Investment A/c . . . Dr 9898
(Ex – Interest)
Interest A/c . . . . . Dr 200
(Interest)
To Bank A/c
10,098 (Cum – Interest)
Purchase Cum Interest
Cum – Interest price is the quotation which includes
the interest. Interest is to be subtracted to get to the
ex – interest price.
Journal Entry
Investment A/c . . . Dr (Ex – Interest)
Interest A/c . . . . . Dr (Interest)
To Bank A/c
(Cum – Interest)
Note : If brokerage is paid it should be Added
Purchase Cum Interest
Example
1.1.2012 50, 8% debentures purchased cum-interest
at ₹ 98. Brokerage at 1% is to be paid. Dates of
interest payment is 31st March and 30th Sept.
Cum – Interest price = 50 X 98 = 4900 + 1% = 4949
Interest = 50 x 100 x 8% x 3/12 = 100
Ex – Interest price = 4949 – 100 = 4849
Investment A/c . . . Dr 4849
Interest A/c . . . . . Dr 100
To Bank A/c
4949
(Ex – Interest)
(Interest)
(Cum – Interest)
Sale Ex Interest
Ex – Interest price is the quotation which does not
include the interest. Interest will be received
separately.
Journal Entry
Bank A/c . . . . . . . Dr (Cum – interest)
To Interest A/c
(Interest)
To Investment A/c (Ex – Interest)
Note : If brokerage is paid it should be subtracted
Sale Ex Interest
Example
1.7.2012 200, 8% debentures sold ex-interest at ₹
98. Brokerage at 1% is to be paid. Dates of interest
payment is 31st March and 30th Oct.
Ex – Interest price = 200 X 98=19600 - 1% = 19404
Interest = 200 x 100 x 8% x 3/12 = 400
Bank A/c . . . . . . . . . . Dr 19,804 (Cum – Interest)
To Interest A/c
400 (Interest)
To Investment A/c 19,404 (Ex – Interest)
Sale Cum Interest
Cum – Interest price is the quotation which includes
the interest. Interest will be subtracted to get the ex
– interest price.
Journal Entry
Bank A/c . . . . . . . Dr (Cum – interest)
To Interest A/c
(Interest)
To Investment A/c (Ex – Interest)
Note : If brokerage is paid it should be subtracted
Sale Cum Interest
Example
1.1.2012 50, 8% debentures Sold cum-interest at ₹
98. Brokerage at 1% is to be paid. Dates of interest
payment is 31st March and 30th Sept.
Cum – Interest price = 50 X 98 = 4900 - 1% = 4851
Interest = 50 x 100 x 8% x 3/12 = 100
Ex – Interest price = 4851 – 100 = 4751
Bank A/c . . . . . . . . . . Dr 4,851 (Cum – Interest)
To Interest A/c
100 (Interest)
To Investment A/c 4,751 (Ex – Interest)
Profit or loss on sale
When investments are sold, we need to calculate profit
or loss on sale. Profit or loss is calculated by comparing
the ex-interest investment sale price to the cost of
investment held.
Journal Entry
Loss on sale
Loss of Sale of Investment A/c . . . . . Dr
To Investment A/c
Profit on sale
Investment A/c . . . . . Dr
To Profit on Sale A/c
Profit or loss on sale
Example
Opening Balance – Face Value ₹1,20,000 Cost ₹ 1,18,000
Purchase – Face Value ₹ 10,000 Cost ₹ 9898
Sale – Face Value ₹ 20,000 Cost ₹ 19,800 (S.P)
Solution
FIFO
Face Value
Opening Balance 1,20,000
Sold
20,000
Selling Price
Profit on Sale
Cost
1,18,000
19,800
133
20,000 x 1,18,000
/ 1,20,000
19,667
Profit or loss on sale
Example
Opening Balance – Face Value ₹1,20,000 Cost ₹ 1,18,000
Purchase – Face Value ₹ 10,000 Cost ₹ 9898
Sale – Face Value ₹ 20,000 Cost ₹ 19,800 (S.P)
Solution
Weighted Average
Face Value
Opening Balance 1,20,000
Purchase
10,000
1,30,000
Sold
20,000
Selling Price
Profit on Sale
Cost
1,18,000
9,898
1,27,898
19,800
123
20,000 x 1,27,898
/ 1,30,000
19,677
Closing Balance of Investment Account
Investment should be valued at lower of cost or net
realisable value whichever is lower.
Practice Problem – Practice manual Q - 4
Mr. Purohit furnishes the following details relating to his holding in 8%
debentures (₹100 each) of P Ltd., held as current assets.
1
1.4.2009 Opening Balance – Face Value ₹ 1,20,000 Cost ₹ 1,18,000
1.7.2009 2 100 Debentures purchased ex – interest at ₹ 98.
4
1.10.2009 Sold 200 Debentures ex – interest at ₹ 100
1.1.2010 5 Purchased 50 debentures at ₹ 98 cum – interest
6
1.2.2010 Sold 200 Debentures ex – interest at ₹99
Due Dates of interest are
3
30th
September and
31st
7
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 ₹99.
Practice Problem – Solution
Time Line
31/3
Interest
1/4
Op. Bal
1/7
30/9
Purchase Interest
1/10
Sold
1/1
Purchase
1/2
Sale
31/3
Interest
Closing
Solution
Time Line
31/3
Interest
Dr
Date 1/4
Op. Bal
Particulars
1.4.09 To Balance b/d
Total 1/7
30/9
Purchase Interest
W.N. Face Value 120000
1/10
Sold
1/1
Purchase
Mr. Purohit
8% Debentures of P. Limited
Interest Cost Date Particulars
1/2
Sale
31/3
Int / Clo
Cr
W.N. Face Interest Cost Value 118000
Total Note : The last date of interest was 31/3 and the opening balance is 1/4
so there is no accrued opening interest. If the dates would have been
different then there would have been opening accrued interest also.
solution
Time Line
31/3
Interest
Dr
Date 1/4
Op. Bal
Particulars
1/7
30/9
Purchase Interest
W.N. Face Value 1.4.09 To Balance b/d
1.7.09 To Bank A/c
10000
1/1
Purchase
Mr. Purohit
8% Debentures of P. Limited
Interest Cost Date Particulars
120000
1
1/10
Sold
118000
200
9898
Total Working Note 1
Ex – Interest price = 100 X 98 = 9800 + 1% = 9898
Interest = 100 x 100 x 8% x 3/12 = 200
Total 1/2
Sale
31/3
Int / Clo
Cr
W.N. Face Interest Cost Value Time Line
solution
31/3
Interest
Dr
Date 1/4
Op. Bal
Particulars
1/7
30/9
Purchase Interest
W.N. Face Value 1.4.09 To Balance b/d
1.7.09 To Bank A/c
1
1/10
Sold
1/1
Purchase
Mr. Purohit
8% Debentures of P. Limited
Interest Cost Date Particulars
120000
-
10000
200
118000 30.9.09 By Bank A/c
Total Working Note 2
Interest = 130000 x 8% x 6/12 = 5200
9898
Total 1/2
Sale
31/3
Int / Clo
Cr
W.N. Face Interest Cost Value 2
-
5200
-
Time Line
solution
31/3
Interest
Dr
Date 1/4
Op. Bal
Particulars
1/7
30/9
Purchase Interest
W.N. Face Value 1.4.09 To Balance b/d
1.7.09 To Bank A/c
1.10.09 To Profit on Sale
1/10
Sold
1/1
Purchase
Mr. Purohit
8% Debentures of P. Limited
Interest Cost Date Particulars
120000
-
1
10000
200
3
-
-
118000 30.9.09 By Bank A/c
9898 1.10.09 By Bank A/c
1/2
Sale
Cr
W.N. Face Interest Cost Value 2
20000
133
Total Total Working Note 4 Profit / Loss on Sale (Fifo Basis)
Face Value
Cost
Opening Balance 1,20,000
1,18,000
Sold
20,000
19,667
Selling Price
19,800
Profit on Sale
133
31/3
Int / Clo
20,000 x 1,18,000 / 1,20,000
5200
-
19800
Time Line
Solution
31/3
Interest
Dr
Date 1/4
Op. Bal
Particulars
1/7
30/9
Purchase Interest
W.N. Face Value 1.4.09 To Balance b/d
1/1
Purchase
Mr. Purohit
8% Debentures of P. Limited
Interest Cost Date Particulars
120000
-
1
10000
200
1.10.09 To Prof of Sale
3
-
-
1.1.10 To Bank A/c
4
5000
100
1.7.09 To Bank A/c
1/10
Sold
1/2
Sale
Cr
W.N. Face Interest Cost Value 118000 30.9.09 By Bank A/c
2
-
9898 1.10.09 By Bank A/c
-
20000
133
4849
Total Working Note 4
Cum – Interest price = 50 X 98 = 4900 + 1% = 4949
Interest = 50 x 100 x 8% x 3/12 = 100
Ex – Interest price = 4949 – 100 = 4849
Total 31/3
Int / Clo
5200
-
19800
Time Line
31/3
Interest
Dr
Date 1/4
Op. Bal
Particulars
1/7
30/9
Purchase Interest
W.N. Face Value 1.4.09 To Balance b/d
1/1
Purchase
Mr. Purohit
8% Debentures of P. Limited
Interest Cost Date Particulars
120000
-
1
10000
200
1.10.09 To Prof of Sale
3
-
-
1.1.10 To Bank A/c
4
5000
100
1.7.09 To Bank A/c
1/10
Sold
1/2
Sale
31/3
Int / Clo
Cr
W.N. Face Interest Cost Value 118000 30.9.09 By Bank A/c
2
9898 1.10.09 By Bank A/c
-
20000
-
19800
5
20000
533
19602
133 1.2.10
By Bank A/c
4849
Total Working Note 5
Ex – Interest price = 200 X 99 = 19800 - 1% = 19602
Interest = 200 x 100 x 8% x 4/12 = 533
Total -
5200
-
Time Line
31/3
Interest
Dr
Date 1/4
Op. Bal
Particulars
1/7
30/9
Purchase Interest
W.N. Face Value 1.4.09 To Balance b/d
1/1
Purchase
Mr. Purohit
8% Debentures of P. Limited
Interest Cost Date Particulars
120000
-
1
10000
200
1.10.09 To Prof of Sale
3
-
-
1.1.10 To Bank A/c
4
5000
100
1.7.09 To Bank A/c
1/10
Sold
1/2
Sale
31/3
Int / Clo
Cr
W.N. Face Interest Cost Value 118000 30.9.09 By Bank A/c
2
9898 1.10.09 By Bank A/c
-
20000
-
19800
By Bank A/c
5
20000
533
19602
By Loss on Sale
6
-
133 1.2.10
4849 1.2.10
Total -
Total Working Note 6 Profit / Loss on Sale (Fifo Basis)
Face Value
Cost
Opening Balance 1,20,000
1,18,000
Sold
20,000
19,666
Selling Price
19,602
Loss on Sale
64
20,000 x 1,18,000 / 1,20,000
5200
-
-
64
Time Line
31/3
Interest
Dr
Date 1/4
Op. Bal
Particulars
1/7
30/9
Purchase Interest
W.N. Face Value 1.4.09 To Balance b/d
1/1
Purchase
Mr. Purohit
8% Debentures of P. Limited
Interest Cost Date Particulars
120000
-
1
10000
200
1.10.09 To Prof of Sale
3
-
-
1.1.10 To Bank A/c
4
5000
100
1.7.09 To Bank A/c
1/10
Sold
Working Note 7
Interest = 95000 x 8% x 6/12 = 3800
31/3
Int / Clo
Cr
W.N. Face Interest Cost Value 118000 30.9.09 By Bank A/c
2
9898 1.10.09 By Bank A/c
-
20000
-
19800
By Bank A/c
5
20000
533
19602
By Loss on Sale
6
-
133 1.2.10
4849 1.2.10
31.3.10 By Bank A/c
Total 1/2
Sale
Total 7
-
5200
-
3800
64
-
Time Line
31/3
Interest
Dr
Date 1/4
Op. Bal
Particulars
1/7
30/9
Purchase Interest
W.N. Face Value 1.4.09 To Balance b/d
-
1
10000
200
1.10.09 To Prof of Sale
3
-
-
1.1.10 To Bank A/c
4
5000
100
Total 135000
1/1
Purchase
Mr. Purohit
8% Debentures of P. Limited
Interest Cost Date Particulars
120000
1.7.09 To Bank A/c
1/10
Sold
1/2
Sale
31/3
Int / Clo
Cr
W.N. Face Interest Cost Value 118000 30.9.09 By Bank A/c
2
9898 1.10.09 By Bank A/c
-
20000
-
19800
By Bank A/c
5
20000
533
19602
By Loss on Sale
6
-
133 1.2.10
4849 1.2.10
31.3.10 By Bank A/c
7
31.3.10 By Balance c/d
8
132800
Working Note 8
Closing cost 132800 – 19800 – 19602 – 64 = 93414
Market Price = 95000 / 100 x 99 = 94050
So lower of cost and market value is 93414
Total -
95000
135000
5200
-
-
64
3800
-
-
93414
132800
Time Line
31/3
Interest
Dr
Date 1/4
Op. Bal
Particulars
1/7
30/9
Purchase Interest
W.N. Face Value 1.4.09 To Balance b/d
-
1
10000
200
1.10.09 To Prof of Sale
3
-
-
1.1.10 To Bank A/c
4
5000
100
31.3.10 To P / L A/c
Total 9533
1/2
Sale
31/3
Int / Clo
Cr
W.N. Face Interest Cost Value 118000 30.9.09 By Bank A/c
2
9898 1.10.09 By Bank A/c
-
20000
-
19800
By Bank A/c
5
20000
533
19602
By Loss on Sale
6
-
133 1.2.10
4849 1.2.10
9233
135000
1/1
Purchase
Mr. Purohit
8% Debentures of P. Limited
Interest Cost Date Particulars
120000
1.7.09 To Bank A/c
1/10
Sold
132800
31.3.10 By Bank A/c
7
31.3.10 By Balance c/d
8
Total -
5200
-
-
64
3800
-
95000
-
93414
135000
9533
132800
Note : Interest being the nominal account, it should be closed
and the balance should be transferred to profit and loss A/c
Variable Income Bearing Securities
The investment in equity shares comes under this
category.
Dr
Date Investment Account Particulars W.N
Face
Dividend Cost Date Cr
Particulars Value
Total W.N Face Dividend Cost Value
Total Cost of investment includes acquisition charges such as
brokerage, fees and duties.
Variable Income Bearing Securities
Some important points to be noted with reference 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.
C) The dividend received for a particular period of time
is assumed to be evenly distributed over the period.
Variable Income Bearing Securities
Right Shares
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 profit and loss statement.
Where the investments are acquired on cum – right basis and the
market value of investment 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.
Variable Income Bearing Securities
Right Shares
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 ₹
200 each. X subscribes for the right issue. Thus, the total cost of X’s
holding of 400 shares would amount to ₹ 90,000
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 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.
Variable Income Bearing Securities
Bonus Shares
Where an investment is acquired by way of issue of bonus shares,
no amount is entered in the cost column of investment account since
the investor has not to pay anything. It only adds to the face value
of the shares.
Variable Income Bearing Securities
Dividend
Dividend on shares is received on the shares held on the day
dividend is announced by the company.
The dividend for the period, for which the shares were not held by
the investor, should not be treated as revenue receipt but they
should treated as capital receipt.
Variable Income Bearing Securities
Dividend
Example
Mr. X Purchase 5000 equity shares of Rahul Ltd. having face value
of ₹ 10 for ₹ 25 on 1/10/2011. The company announces
dividend @ 10% on 15/3/2012 for the year 2011. Calculate
total dividend and the amount that can be credited to cost.
Solution
Total Dividend = 5000 x 10 x 10% = ₹ 5,000
01/01/2011
01/10/2011
31/12/2011
Amount credited to the cost = ₹ 5,000 x 9 / 12
= ₹ 3,750
Variable Income Bearing Securities
Journal Entries
Purchase
Investment A/c . . . . . . Dr
To Bank A/c
Sale
Bank A/c . . . . . .
To Investment A/c
Dr
Profit or loss on sale
When investments are sold, we need to calculate profit
or loss on sale. Profit or loss is calculated by comparing
the selling price to the cost of investment held.
Journal Entry
Loss on sale
Loss of Sale of Investment A/c . . . . . Dr
To Investment A/c
Profit on sale
Investment A/c . . . . . Dr
To Profit on Sale A/c
Practice Question – Study Material ILL 2 – Page No 12.7
On 1.4.2010 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 31.1.2011 bonus was declared in the ratio 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 31.3.2011 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.
Practice Question – Study Material ILL 2 – Page No 12.7
Time Line
1/4
Purchase 31/1
Bonus 31/3
Sale
31/3
Closing
Time Line
1/4
Purchase 31/1
Bonus 31/3
Closing
Mr. Krishna
Equity Shares of Telco Ltd.
Dr
Date 31/3
Sale
Particulars
1.4.10 To Bank A/c
Total W.N. Face Dividend Cost Value 1 100000
Date Cr
Particulars
W.N. Face Dividend Cost Value 123000
Total Working Note 1
Cost = 1000 x 120
= 120000 + 2% on120000 + ½ % (50 p per ₹ 100) on 120000
= 123000
Time Line
1/4
Purchase 31/1
Bonus 31/3
Closing
Mr. Krishna
Equity Shares of Telco Ltd.
Dr
Date 31/3
Sale
Particulars
1.4.10 To Bank A/c
31.1.11 To Bonus Shares
Total W.N. Face Dividend Cost Value 1 100000
-
2
-
50000
Date Cr
Particulars
123000
-
Total Working Note 2
Bonus in the ratio 1 for 2 = 1000 / 2 = 500 x 100 = 50,000
W.N. Face Dividend Cost Value Time Line
1/4
Purchase 31/1
Bonus 31/3
Closing
Mr. Krishna
Equity Shares of Telco Ltd.
Dr
Date 31/3
Sale
Particulars
1.4.10 To Bank A/c
31.1.11 To Bonus Shares
W.N. Face Dividend Cost Value 1 100000
-
2
-
50000
Date Cr
Particulars
123000 31.3.11 To Bank A/c
-
Total Working Note 3
Selling price = 500 x 90 = 45000 – 2% = 44100
Total W.N. Face Dividend Cost Value 3
50000
-
44100
Time Line
1/4
Purchase 31/1
Bonus 31/3
Closing
Mr. Krishna
Equity Shares of Telco Ltd.
Dr
Date 31/3
Sale
Particulars
1.4.10 To Bank A/c
W.N. Face Dividend Cost Value 1 100000
-
31.1.11 To Bonus Shares
2
50000
-
-
31.3.11 To Profit on Sale
4
-
-
3100
Date Cr
Particulars
123000 31.3.11 To Bank A/c
Total Working Note 4 Profit / Loss on Sale
Face Value
Cost
Purchase
1,00,000
1,23,000
Bonus
50,000
.
Total cost
1,50,000
1,23,000
W.N. Face Dividend Cost Value 3
50000
-
44100
Total Cost of Investment Sold
= 50,000 x 123000 / 150000 = 41,000
Selling Price
44,100
Profit on Sale
3,100
Time Line
1/4
Purchase 31/1
Bonus 31/3
Closing
Mr. Krishna
Equity Shares of Telco Ltd.
Dr
Date 31/3
Sale
Particulars
1.4.10 To Bank A/c
W.N. Face Dividend Cost Value 1 100000
-
31.1.11 To Bonus Shares
2
50000
-
-
31.3.11 To Profit on Sale
4
-
-
3100
Date Cr
Particulars
W.N. Face Dividend Cost Value 123000 31.3.11 By Bank A/c
31.3.11 By Balance c/d
Total 150000
126100
Total Working Note 5 – Valuation of Closing Stock
Cost = 123000 + 3100 – 44100 = ₹82000
Market Value = 1000 (1500 – 500) x 90 = ₹90000
Closing Balance will be he lower of cost or market value i.e. ₹82000
3
50000
5 100000
150000
-
44100
-
82000
126100
Practice Question – Study Material ILL 4 – Page No 12.8
1
0n
Jan ,10, Singh had 20,000 equity shares in X Ltd. Face value of the shares was ₹ 10
each but their book value was ₹ 16 per share. On 1st June,10 Singh purchased 5,000 equity
2
shares in the company at a premium of ₹ 4 per share.
On 30th June,10, the directors of X Ltd. announced a bonus and rights issue. Bonus was
declared at the rate of one equity share for every 5 shares held and this shares were
received on 2nd August, 2010. 3
The Terms of Rights issue were
1. Rights shares to be issued to the existing holders on 10th Aug, 2010
2. Rights issue would entitle the holders to subscribe to additional equity shares in the ratio
of 1 for 3 @₹ 15 per share and amount was payable on 30th Sept, 2010. 4
3. Existing holders may either wholly or partly, transfer their rights to outsiders.
4. Singh exercised his option under the issue for 50% of his entitlement and the balance of
rights he sold to Ananth for a consideration of ₹ 1.50 per share.
5. Dividends for the year ended 31st March, 2010 at the rate of 15% were declared by
the company and received by Singh on 20th October, 2010. 5
6. On 1st November, 2010, Singh sold 20,000 equity shares at the premium of ₹ 3 per
6
shares.
7
The market price of shares on 31-12-2010 was ₹ 13. Show the investment account as it
would appear in Singh’s books on 31-12-2010 and the value of shares held on that date.
1st
Practice Question – Study Material ILL 4 – Page No 12.8
Time Line
1/1
1/6
2/8
30/9
20/10
1/11
31/12
Opening Purchase Bonus
Rights Dividend
Sale Closing
Time Line
1/1
Opening 1/6
Purchase 2/8
Bonus
20/10
Dividend
1/11
Sale 31/12
Closing
Singh
Equity Shares of X Ltd.
Dr
Date 30/9
Rights Particulars
1.1.10 To Balance b/d
W.N. Face Dividend Cost Value 1
200000
-
Total Working Note 1
Opening Balance
Face Value = 20,000 x 10 = 200,000
Cost = 20,000 x 16 = 320,000
Date Cr
Particulars
320000
Total W.N. Face Dividend Cost Value Time Line
1/1
Opening 1/6
Purchase 2/8
Bonus
20/10
Dividend
1/11
Sale 31/12
Closing
Singh
Equity Shares of X Ltd.
Dr
Date 30/9
Rights Particulars
W.N. Face Dividend Cost Value 1.1.10 To Balance b/d
1
200000
-
320000
1.6.10 To Bank A/c
2
50000
-
70000
Total Working Note 2
Purchase
Face Value = 5,000 x 10 = 50,000
Cost = 5,000 x 14 = 70,000
Date Cr
Particulars
Total W.N. Face Dividend Cost Value Time Line
1/1
Opening 1/6
Purchase 2/8
Bonus
20/10
Dividend
1/11
Sale 31/12
Closing
Singh
Equity Shares of X Ltd.
Dr
Date 30/9
Rights Particulars
W.N. Face Dividend Cost Value 1.1.10 To Balance b/d
1
1.6.10 To Bank A/c
2.8.10 To Bonus Issue
2
3
Total 200000
-
320000
50000
50000
-
70000
-
Date Cr
Particulars
W.N. Face Dividend Cost Value Total Working Note 3
Bonus Issue = 1 for 5 shares held = 25,000 / 5 = 5000 x 10 = 50,000
Time Line
1/1
Opening 1/6
Purchase 2/8
Bonus
20/10
Dividend
1/11
Sale 31/12
Closing
Singh
Equity Shares of X Ltd.
Dr
Date 30/9
Rights Particulars
W.N. Face Dividend Cost Value 1.1.10 To Balance b/d
1
200000
-
1.6.10 To Bank A/c
2.8.10 To Bonus Issue
2
3
50000
50000
-
70000
-
30.9.10 To Bank (Rights)
4
50000
-
75000
Date Cr
Particulars
320000 30.9.10 By Bank (Rights)
Total Working Note 4
Rights Issue = 1 for 3 shares held = 30,000 / 3 = 10,000
Purchase of Rights = 10,000 X 50% x 15 = ₹ 75,000
Sale of Rights = 10,000 x 50% x 1.5 = ₹ 7,500
Total W.N. Face Dividend Cost Value 4
-
-
7500
Time Line
1/1
Opening 1/6
Purchase 2/8
Bonus
20/10
Dividend
1/11
Sale 31/12
Closing
Singh
Equity Shares of X Ltd.
Dr
Date 30/9
Rights Particulars
W.N. Face Dividend Cost Value 1.1.10 To Balance b/d
1
1.6.10 To Bank A/c
2.8.10 To Bonus Issue
30.9.10 To Bank (Rights)
Date Cr
Particulars
200000
-
2
3
50000
50000
-
70000 30.9.10 By Bank A/c
(Dividend)
-
4
50000
-
75000
W.N. Face Dividend Cost Value 320000 30.9.10 By Bank (Rights)
Total 4
-
5
-
-
7500
30000
7500
Total Time Line
1/1
Opening 1/6
Purchase Working Note 5
Dividend = 250000 x 15% = 37,500
Credited to cost = 50,000 (Purchased on 1/6/10) x 15% = 7500
Note : No Dividend shall be received on Bonus Issue and Rights Issue
2/8
Bonus
30/9
Rights 20/10
Dividend
Time Line
1/1
Opening 1/6
Purchase 2/8
Bonus
20/10
Dividend
1/11
Sale 31/12
Closing
Singh
Equity Shares of X Ltd.
Dr
Date 30/9
Rights Particulars
W.N. Face Dividend Cost Value 1.1.10 To Balance b/d
1
200000
-
1.6.10 To Bank A/c
2.8.10 To Bonus Issue
2
3
50000
50000
-
30.9.10 To Bank (Rights)
4
50000
-
Total Working Note 6
Sale
Face Value = 20000 x 10 = 200000
Cost = 20000 x 13 = 260000
Date Cr
Particulars
320000 30.9.10 By Bank (Rights)
W.N. Face Dividend Cost Value 4
-
70000 30.9.10 By Bank A/c
(Dividend)
-
5
-
30000
7500
75000 1.11.10 By Bank A/c
6
200000
-
260000
Total -
7500
Time Line
1/1
Opening 1/6
Purchase 2/8
Bonus
20/10
Dividend
1/11
Sale 31/12
Closing
Singh
Equity Shares of X Ltd.
Dr
Date 30/9
Rights Particulars
W.N. Face Dividend Cost Value 1.1.10 To Balance b/d
1
200000
-
1.6.10 To Bank A/c
2.8.10 To Bonus Issue
2
3
50000
50000
-
30.9.10 To Bank (Rights)
4
50000
-
1.11.10 To Profit on Sale
7
-
Date Cr
Particulars
320000 30.9.10 By Bank (Rights)
-
Total W.N. Face Dividend Cost Value 4
-
-
70000 30.9.10 By Bank A/c
(Dividend)
-
5
-
30000
7500
75000 1.11.10 By Bank A/c
6
200000
-
260000
2857
Total Working Note 7 – Profit or Loss on Sales
Investment Held = Face Value = 200000 + 50000 + 50000 + 50000 = ₹350000
Cost Price = 320000 + 70000 + 75000 – 7500 – 7500 = ₹450000
Cost of Investment Sold = 200000 x 450000 / 350000 = ₹257143
Profit on sale = 260000 (SP) – 257143(CP) = ₹2857
7500
Time Line
1/1
Opening 1/6
Purchase 2/8
Bonus
20/10
Dividend
1/11
Sale 31/12
Closing
Singh
Equity Shares of X Ltd.
Dr
Date 30/9
Rights Particulars
W.N. Face Dividend Cost Value 1.1.10 To Balance b/d
1
200000
-
1.6.10 To Bank A/c
2.8.10 To Bonus Issue
2
3
50000
50000
-
30.9.10 To Bank (Rights)
4
50000
-
1.11.10 To Profit on Sale
7
-
-
Date Cr
Particulars
320000 30.9.10 By Bank (Rights)
4
-
70000 30.9.10 By Bank A/c
(Dividend)
-
5
-
30000
7500
75000 1.11.10 By Bank A/c
6
200000
-
260000
350000
-
7500
8
150000
-
192857
2587
31.12 By Balance c/d
Total W.N. Face Dividend Cost Value 467857
Total 350000
Working Note 8 – Valuation of Closing Stock
Face Value = 350000 – 200000 = 150000
Cost = 450000 – 257143 = 192857 or 150000 x 450000 / 350000 = 192857
Market Value = 150000 / 10 x 13 = 195000
The closing has to be lower of cost or market price = 192857
467857
Time Line
1/1
Opening 1/6
Purchase 2/8
Bonus
20/10
Dividend
1/11
Sale 1/11
Closing
Singh
Equity Shares of X Ltd.
Dr
Date 30/9
Rights Particulars
W.N. Face Dividend Cost Value 1.1.10 To Balance b/d
1
200000
-
1.6.10 To Bank A/c
2.8.10 To Bonus Issue
2
3
50000
50000
-
30.9.10 To Bank (Rights)
4
50000
-
1.11.10 To Profit on Sale
7
31.12 To P / L A/c
Total -
-
Date Cr
Particulars
320000 30.9.10 By Bank (Rights)
W.N. Face Dividend Cost Value 4
-
-
7500
70000 30.9.10 By Bank A/c
(Dividend)
-
5
-
30000
7500
75000 1.11.10 By Bank A/c
6
200000
-
260000
8
150000
-
192857
2587
30000
350000 30000 467857
31.12 By Balance c/d
Total 350000 30000 467857
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