INVESTMENT ACCOUNTS

PRACTICE QUESTIONS

Q-1 X sales to Y 500 shares at a price of Rs. 60/- Y pays Brokerage 1% & stamp duty Rs. 300/-. X
pays Brokerage 1%.
Date Calculation For Y (Buyer) For X (Seller)
Purchase / Sale value 500@ 60 30,000 30,000
Brokerage 1% + 300 1% – 300
Stamp duty + 300 -
Cost 30,600 Net Sale 29,700

Journal Entry:

Books of Y (Buyer) Books of X (Seller)

Investment a/c - Dr. 30,600 Bank a/c - Dr. 29,700
To Bank a/c - 30,600 To Investment a/c - 29,700

Q-2 On 1st April, 2010 X, Y, and Co. held 9% Debentures in Banbury Ltd. of the face value of Rs.
10,000 at cost of Rs. 8,000 Market Value on that date was Rs. 9,000. Interest is payable on 31st
December every year. On 1st December, 2010 debentures of nominal value of Rs. 6,000 were
purchased for Rs.5,000 ex-interest and on 31st December, 2010 Debentures of Nominal Value
of Rs.2,000 were sold-cum-interest for Rs.1,900. On 1st January, 2011 Debentures of nominal
value of Rs.6,000 were bought at Rs.5,800. The market value of the Debentures on 31st March,
2011 was at Rs. 90. Make out Investment A/c. in the books of X, Y, and Company showing
profits or loss on sale of Investment. Stocks on 31st March each year are valued at lower of cost
and market price.

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 A-2 In The Books of X, Y & Co.

9% Debentures in Banbury Ltd. A/c

Date Particulars Face Interest Amt Date Particulars

Face Interest Interest
Value Value
01.04.10 To 10,000 225 8,000 31.12.10 By bank 2,000 180 1,720
opening a/c (Sale)
bal. b/f
01.12.10 To bank 6,000 495 5,000 31.12.10 By bank - 1,260 -
(Purchase) a/c (int.)
a/c
01.01.11 To bank 6,000 - 5,800 31.03.11 By balance 20,000 450 17,200
(Purchase) c/f
a/c
31.03.11 To Profit - - 120
on sale a/c
31.03.11 To Interest - 1,170 -
tr. to P&L
a/c
22,000 1,890 18,920 22,000 1,890 18,920

Working Notes:

(1) Closing stock valuation (FIFO) Rs.

Face value Out of Opening lot 8,000 X 8,000 / 10,000 6,400

8,000
6,000 Purchase of 1.12.10 5,000
6,000 Purchase of 1.1.11 5,800
20,000 Cost 17,200
Market value (200  90) 18,000
Valued at lower of cost & market value

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 For alternative see point (6)

(2) Accrued interest on 1.4.2010 = 10,000 x 9% x 3/12 = 225

(3) Interest received on 31.12.2010 = 14,000 x 9% = 1,260

(4) On purchases of 1.1.2011 no accrued period hence, no interest.

(5) Accrued interest on 31.3.2011 = 20,000 x 9% x 3/12 = 450

(6) Cost of Closing balance on weighted average = 18,800 / 22,000 X 20,000 = Rs.17091

M.V. is Rs. 18,000/- hence stock will be valued at Rs. 17,091.

Then profit on sale will be Rs. 11 instead of Rs. 120.

Q-3 1,000 12% Debentures of Reliance Ltd. which pays interest on every 31st March & 30th
Sept., are purchased by A from B on 31st July at Rs. 107 cum-interest & again 500 debenture on
30th November at Rs.102 Ex-interest. Pass entries.

A-3
Books of ‘A’ (Purchaser) Books of ‘B’ (Seller)
31.7. Investment a/c - Dr.1,03,000 Bank a/c - Dr. 1,07,000
Cum interest Interest a/c - Dr. 4,000 To Investment a/c
To Bank a/c 1,07,000 1,03,000
To Interest a/c 4,000
Cum Interest value (total value) 1,000 x 107 = 1,07,000
(-) Interest (1st April to 31st July) (1,00,000 x 12% x 4/12) = 4,000
Ex-Interest Value (Value of investment) = 1,03,000

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 30.11 Investment a/c - Dr. 51,000 Bank a/c - Dr. 52,000
Ex-interest Interest a/c - Dr. 1,000 To Investment a/c 51,000
To Bank a/c 52,000 To Interest a/c 1,000
Ex- Interest value (Investment value) (102 x 500) = 51,000
+ Interest (1st Oct. to 30th Nov) (50,000 x 12% x 2/12) = 1,000
Cum-Interest Value (total Value) = 52,000

Q-4 1,000 12% Debentures of Rs.100 each of Reliance Ltd. which pays interest on every 31st
December & 30th June, are held by A Ltd. as on 1.04.2010. As on 31.03.2011 the number of
Debentures held was 1,500. Calculate Opening and Closing accrued interest & Pass entries.

A-4 Journal Entry in the Books of A Ltd.

Date Particulars Dr. Rs. Cr. Rs.

1.4.10 Opening Accrued Interest from 1.1 to 31.3.10
transferred
Income/Interest A/c Dr.
To Opening Accrued Interest A/c
(1,000 X 100 X 12% X 3/12 = 3,000)
31.3.11 Closing Accrued Interest from 1.1 to 31.3.11
recognized
Closing Accrued Interest A/c Dr.
To Income/Interest A/c
(1,500 X 100 X 12% X 3/12 = 4,500)

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Q-5 1000 shares of Rs. 100 each purchased on 1.7.2010 at a cost of Rs. 1,50,000 through a
broker who is entitled for 2% brokerage and stamp duties for transfer is Rs. 5,000. On
1.10.2011, 20% dividend is received from the above company for the year 1.4.2010 to
31.3.2011

A-5 Journal Entry in the Books of Investor

Date Particulars Dr. Rs. Cr. Rs.

1.7.2010 Investment in shares made (Face value 1,000 X 100 =
1,00,000) 1,58,000
Investment in shares A/c Dr. 1,58,000
To Bank A/c
(Purchase cost 1,50,000 + Brokerage 3,000 + Stamp duty
5000)
1.10.2011 Dividend received
Bank a/c (1,00,000 x 20%) Dr. 20,000
To Investment a/c (pre-acquisition dividend 1.4 to 30.6.10) 5,000
To Dividend Income a/c (post-acquisition 1.7.10 to 31.3.11) 15,000

Q-6 ' In illustration (6) above, if he subscribes for the rights

A-6
Investment a/c Dr. 7,500
To Bank a/c 7,500

(This will be clubbed with original holding and hence total will be 1500 shares at a cost of Rs.
27,500)

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Q-7 ' In illustration (6) if he sells the right at Rs. 3 each, & the original lot was purchased ex-right
(i.e. old holding)

A-7
Bank a/c Dr. 1,500
To Income from rights sale a/c (P&L a/c) 1,500

(This entry will be irrespective of what is the market price after rights issue i.e. price may be
lower or higher than Rs. 20)

Q-8 ' In illustration (6) if he sells the right at Rs. 3 each. The original lot was purchased cum-
right (i.e. recent purchase). And If the market value of shares ex-right (i.e. after the right
allotment is completed and old + new shares are traded in the market) is Rs. 20 or more.

A-8
Bank a/c Dr. 1,500
To Income a/c (P&L a/c) 1,500

Q-9 ' In illustration (6) if he sells the right at Rs. 3 each. The original lot was purchased cum-right
(i.e. recent purchase). And If the market value of shares ex-right is Rs. 18.50 or less (M.V. of the
holding will be Rs. 18,500/- or less)

A-9
Bank a/c Dr. 1,500

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To Investment a/c 1,500

Q-10 ' In illustration (6) if he sells the right at Rs. 3 each. The original lot was purchased cum-
right (i.e. recent purchase). And If the market value of shares ex-right is Rs. 19 (M.V. of the
holding will be Rs. 19,000/-)

A-10
Bank a/c Dr. 1,500
To Investment a/c 1,000
To Income a/c (P&L a/c) 500

Q-11 ‘M’ holds 500 Equity shares at Tata Ltd. at Rs. 300 each. Company declares Bonus @ 1: 5.
Explain effect for M.

A-11

Cost of Holding of ‘M’ before Bonus 500 @ 300 1,50,000

+ Bonus Shares (500 / 5 x 1) 100 Free –
Cost of holding after Bonus 600 1,50,000
i.e. Cost now is 1,50,000 / 600 = Rs. 250 each.

Note: Refer AS-13 'Accounting for Investment' for meaning, classification and other details.

Q-12 Jaipur Investments Ltd. hold 1,000 15 percent Debentures of Rs100 each in Udaipur
Industries Ltd. as on 1st April, 2010, at a cost of Rs. 1,05,000. Interest is payable on 30th June
and 31st December each year. On 1st May, 2010, 500 debentures are purchased-cum-interest

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 at Rs. 54,300. On 30th November, 2010, 400 debentures are purchased ex-interest at Rs.
38,400. On 31st December, 2010, 400 debentures are sold-cum-interest for Rs. 55,000. Prepare
Investment A/c., Valuing holding on 31st March, 2011 at cost (applying FIFO method).

A-12 Investment in Debenture Of Udaipur Ind. Ltd. a/c

Date Particulars F.V. Interes Investment Date Particulars F.V. Intere Investme
t st nt
1.4 To Opening 1,00,000 3,750 1,05,000 30.6 By Bank - 11,250 -
Balance b/f a/c
1.5 To Bank a/c 50,000 2,500 51,800 31.12 By Bank 40,000 3,000 52,000
a/c
30.11 To Bank a/c 40,000 2,500 38,400 31.12 By Bank -- 11,250 --
a/c
31.12 To Profit on --- --- 10,000 31.3 By -- 5,625 --
sale a/c Accrued
Interest
a/c
31.3 To Interest --- 22,375 --- 31.3 By Balance 1,50,000 -- 1,53,200
Income a/c c/f
1,90,000 31,125 2,05,200 1,90,000 31,125 2,05,200

Working Notes:
1. Purchase on 1.5
Cum Interest Value = 54,300

(-) Interest for 4 months 15 / 100 X 50,000 X 4 / 12 = 2,500

Ex. Interest value (Cost) 51,800

2. Explanation for adjusting opening accrued interest in interest account:

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Interest accrued for 3 months (1.1.10 to 31.3.10) is not the income of current year but is of
previous year and it must have been accounted in the previous year as income as per
mercantile system. Entry in previous year would have been as follows:
Interest Accrued a/c - Dr. 3,750
To Interest a/c 3,750 Nominal a/c hence it will be credited to P&L a/c

(Closing Balance will be transferred to this current year)

This year interest will be received for 6 months (1.1.10 to 30.6.10) but actually this year’s
interest income is for 3 months (1.4.10 to 30.6.10) Opening balance of 3 months interest
accrued a/c will be shown in debit side & 6 months interest received will be credited to that
a/c. Thus automatically 3 months income will get credited.

3. Half Yearly Interest Received on 30.6 :

1,50,000 X 15 / 100 X 6 / 12 = 22,500 / 2 = 11,250

4. Purchase on 30.11

Ex-Interest value 38,400

(-) Interest (40,000 X 15 % X 5 /12 ) 2,500

Cum Interest Value 40,900

5. Sale on 31.12
Cum Interest Value 55,000

(-) Interest 15 / 100 X 40,000 X 1 /2 3,000

Ex-Interest Value 52,000

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6. Cost of Investment ( Closing Balance on FIFO)
Face Value Cost

1st 60,000 X 1,05,000 / 1,00,000 63,000

2nd 50,000 51,800

3rd 40,000 38,400

1,50,000 1,53,200

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