ACCOUNTANCY FORM FIVE TOPIC 8: INVESTMENT ACCOUNT

 Meaning of Investment Account:

Investment means to spend money outside the business in order to earn some income which are non-trading in nature.

Usually, money is invested in Government Bonds, Securities, Shares and Debentures of companies etc.

An investment account is a current account linked to a securities account. It is used to transfer money in transactions to securities and deposit services. An investment account is particularly intended for transactions in funds, stocks, bonds, and ETFs.

Investments are made in two ways:

(a) As Trade Investments:

The investments which are made permanently for a regular income outside the business is known as Trade Investment. These are treated as fixed assets.

That is why if this type of investments are sold at a profit, profit on such sale of investment is transferred to Capital Reserve Account and not to Profit and Loss Account.

(b) As Marketable Securities:

Sometimes a business wants to invest its idle cash purely on a temporary basis (of course, if the rate of earning is higher than cost of capital). This type of investment is known as Marketable Securities and is treated as Current Assets.

That is why profit or sale of such investments is transferred to Profit and Loss Account and not to Capital Reserve.

It can be divided into two main classes

To spend money for the purpose of generating income

1. Government stocks e.g.: treasury bills, bonds etc

2. Investment in limited companies e.g. shares, stock / debenture

Terms used in investment account

1. Sales and purchases of investment \investment can be either bought or sold without interest (Cum-div)

2. Interest (Cum-div)

3. Without interest (ex – div)

NOTE:

1. General (Cum-div) means that the purchase price includes interest accrued / interest outstanding to date of purchase. For this case it should be excluded from the capital value.

2. Generally (ex – div) means that the purchase price includes interest accrued /interest outstanding to date of purchase for this case it should be excluded from the capital value.

Accounting treatments /records.

Records: Particulars of money invested in different type of securities e.g Government stock, shares, debentures etc.

Per value (Nominal value)

1. Purchase price – capital value

2. Interest received / Accrued

3. Different between cum-div and Ex – div

1. The purchase price include the interest accrued up to date of purchase where as this is not included in the case of ex – interest.

2. Nothing is payable for interest accrued where as it is payable in case of ex – interest.

3. Purchase drive is more than the real price of the security but the purchase price is the real price in case of ex –interest.

Date	Details	F	Nominal	Income	Cost/capital	date	Details	F	Nominal	Income	Cost/capital

PROCEDURES IN RESPECT OF FIXED INTEREST SECURITIES

Purchase “Cum-div”

• Stamp duty
• Brokerage
• Transfer fees etc.

1. Calculate the dividend accrued from the date it was last paid to the date of purchase this amount represent the income content in the purchase consideration.

2. We debit income columns with figure calculated in “b” above and the balance of purchase price to the cost column

3.We have to credit income column with income when received.

Purchase (“ex – Div”)

1. Debit cost column with total purchase price inclusive of all expenses.

2. Calculate the dividend from the date of purchase to the data of payment. This amount represent the income deluded from the

3. By means of journal entries debit cost column with figures At in (ii) and credit income column with the same amount.

Sales (“Cum-div”)

1. Work out the net proceeds of sales after deducting /reducing or brokerage

2. calculate the div. This amount represents the income deducted from the sales.

• On receipt of interest credit this cost Column.

Sales (“Ex – div”)

1. The amount of dividend or interest by which the sell price  reduced is debited.

2. The whole of the profit proceed are credited to the net column.

calculation on profit or loss on sale of investment

Profit /loss on sale of investment

Profit /loss              

Note: Profit is when amount received from sale of investment is greater than the cost of investment sold

while loss is when amount from sale of investment is less that the cost of investment sold.

ILLUSTRATION

On 31^st March 2006, ABC Ltd purchased 160,000/= 4% government stock  at 92 cum-div brokerage charges amounted to 6400 interest is half yearly on 30^th June and 31^st December. On 1^st June 2008, 90,000/= of the stock was sold at 94 ex – div Brokerage chargers to 3800 show investment for the year 2006 and 2008

DR   4% Government stock Account     CR

DATE	DETAILS	NOMINAL	INCOME	COST	DATE	DETAILS	NOMINAL	INCOME	COST
2006					2006
31.3	Purchase	160,000	1,600	152,000	30.6	Interest(Bank)		3,200
	Profit & Loss		4,800		31.12	Interest(Bank)		3,200
					31.12	Balance c/d	160,000	–	152,000
		160,000	6,400	152,000			160,000	6,400	152,000
2007				152,000	2007
01.01	Balance b/d	160,000			30.06	Interest(Bank)		3,200
	P&L		6,400		31.12	Interest(Bank)		3,200
					31.12	Balance c/d	160,000	–	152,000
		160,000	6,400	152,000			160,000	6,400	152,000
2008					2008
01.01	Balance b/d	160,000		152,000	01.06	Sales	90,000	–	80,800
01.06	P&L(Adjustment)		300		01.06	Adjustment			300
31.12	P&L		4,300		30.6	Interest(Bank)		3,200
					31.12	Interest(Bank)		1 ,400
					31.12	Balance c/d	70,000	–	70,900
		160,000	4,600	152,000			160,000	4,600	152,000
2009
01.01	Balance b/d	70,000		70,900

WORKINGS

160,000 x 92%            = 147,200

Add: Brokerage =     6,400

153,600

Less: Interest

4/100   x 160,000 x 3/2= 1,600

Cost                                              =152,000

Calculation of interest receivable

160’000 x 4/100 x 6/12   = 3,200

Sales of interest

90’000 x 94%                =   84,600

Add: Interest

4/100 x 90’000 x 1/12       =     300

84,900

Less: Brokerage                                3,800

Actual sales                          81,100

PROFIT /LOSS ON SALE OF INVESTMENT

Sales proceeds     90’000 x 94%	84,600
Add:   Interest	300	84,900
Less: Brokerage		3,000
Actual sales		81,100
Less cost of sold (90,000/160,000 ×152,000)		85,500
Loss on sale of   investment		44,000

 On 31^st March 2006, I am limited purchase 800’00/= 4% government stock cum-div at 92 and brokerage was 32,000/= interest is paid on 30tha June and 31^st December.

On 1^st June 450,000/= of the stock was sold at 94 ex-div brokerage amounting to 19,000/=. The Company repairs final account annually to 30^th September show 4% government stock a/c in the company’s books making suitable approximate between capital and revenue ignore income tax.

Show profit I loss on sale of investment.

Notes

1. Interest cum-div i.e. buyer shall not pay any amount way of interest since it is cum-div

Ex – div i.e. the buyer is to pay interest.

BROKERAGE

-Any amount paid by way of brokerage for purchase security shall be taken as a part of a cost of securities.

-Any brokerage paid on sales of securities should be deduced from the sale price of the securities.

-Profit & loss on sale of securities, in case any securities are sold during the year, any profit or loss on sale of such securities is usually transferred to the P & L A/C.

-Valuation /valued securities, at the end of accounting year the securities are usually valued on the basis of “Cost” “or” whichever is lower or whichever is less or market price.

-Any loss account of such valuation should be transferred.

-When the ordinary shares purchase, the full cost investment including expenses is debited to the cost column.

-There is no apportion ate of dividend on the purchase or sale of ordinary shares.

– The holders of ordinary shares are mostly entitled to receive some bonus share and right issues.

BONUS ISSUE

When successful companies issue bonus to capitalize their reserve, the shareholders are not required to pay any amount for such shares.

The number of shares should be entered in the number of face value (nominal column) and nothing could be added in the amount of principle or cost column.

RIGHT ISSUE

If shares are first offered to the existing share holders as a matter of their rights, such shares are called RIGHT ISSUE such shares may be purchase by the share holders.

ILLUSTRATION I

A.B.C Ltd Bought 10,000 ordinary shares of each 1 shillings in Sahara Ltd on first April, 2008 at a cost 12,000/= on 1^st August, 2008, Sahara Ltd made a bonus issue of 1 share for every 5 share held.

On 7^th October, 2008 a (Dividend which applied to the bonus share) at 6% was received for the year ended 31^st August 2008.

A.B.C Ltd Sold 300 of shares on 30^th October for 3450 show Ordinary share a/c recording the above in the books of ABC Ltd.

Workings:

1: 5

X: 10,000

Bonus  = 2000

Dividend:

12,000 * 6% = 720

IN THE BOOKS OF ABC

DR  ORDINARY SHARE A/C   CR

Date	Details	Nominal	Income	Cost	Date	Details	Nominal	Income	Cost
1.4.08	purchase (bank)	10,000		12,000		dividend(bank)		720
1.8.08	bonus issue	2,000				sales(bank)	3,000		3,450
	P&L		720			balance   c/d	9,000		8,550
		12,000	720	12,000			12,000	720	12,000
	balance   c/d	9000		8,550

ILLUSTRATION II

Wewe limited purchased 20000 Ordinary shares of 11= each in mimi limited on 1^st January, 2009 at the cost of 30,000/= on 1^st July, mimi Limited announced a right issue of 2 Ordinary shares for every 5 held on that date at 1.75/= per share.

Wewe limited took up 60% of the entitlement and sold the remaining 40% at 0.8 per share. Wewe limited received a divided of 25% record these transaction in the books of wewe limited for the year ended 31^st December 2009.

Workings

• Taken up: x   8,000   = 8,000 shares x 1.75 = 14,000
• Right sold: [[8,000*40%]*0.8]->2560
• Ordinary share   = 20,000

Right issue         =   4,800

Dividend 25% x   28,000     =   7,000

DR   ORDINARY SHARE INVESTMENT ACCOUNT                 CR

Date	Details	Nominal	Income	Cost	Date	Details	Nominal	Income	Cost
1.1.2009	purchases	20,000		30,000	01.07.2009	right issue
1.7.2009	right taken up	8,000		14,000		sale bank			2560
31.12.2009	P&L		7,000		31.12.2009	Dividend rec		7,000
					31.12.2009	Balance c/d	28,000	–	4,1440
		28,000	7000	44,000			28,000	7,000	44,000
1.1.2010	balance   b/d	28,000		41,400

 NOTES:

<> Right taken entered in nominal column the number of shares taken up and in cost column the cost of these shares.

<> Right sold /Right issue sold credit proceeds of sale in cost column.

<> These sale does not reserves in profit or but reduces the average cost of share holder.

EXERCISE

1. Cd ltd bought 2000 ordinary of 1/= each in 5 ltd on 1^st April 2008 at cost of 24000/= on 1^st August, 2008, 5 ltd made a bonus issue on 1 share for every 5 shares held. On 7^th October 2008, a (Dividend) which applied to the braes Shan of 6% was received for year ended.

CD Ltd sold 6000 of the shares on 31^st October, 2008 setta the made such apportion ate as practice.

2. X Ltd bought 10,000 Ordinary Share of 1/= each in B Ltd on 1^st 1.2009 at a cost of 15,000/= On 1^st July, B Ltd announced the right issue of 2 Ordinary shares for every 5 held on that date at 1.25 per share X Ltd look up 50% of the entitlement and sold the remaining 50% at 0.6 per share. X Ltd received a dividend of 20% on Ordinary share in B Ltd on 31.12.2009

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