ACCOUNTING FOR INVESTMENTS

According to SAS 13 (IFRS 9), Investments are assets acquired by an enterprise for the
purpose of capital appreciation or income generation without activities in the form of
production, trade or provision of further services.

In other words, investments are assets acquired not for use in the operations of an enterprise
but for accretion of wealth through capital gains or incomes earned in form of interest or
dividends. Investment in this sense will exclude property investments.

Types of Investment
a. Fixed Income Investment - on which interest or dividend is receivable at fixed or specific
rates. Examples are preference shares, debentures, government development stocks,
treasury bills or certificate, etc

b. Variable Income Investment - mainly equity or ordinary shares of a firm, on which

returns are not fixed, but depends on the future earnings of the firm.

c. Short-term investments - these are readily realisable within a period of one year.

d. Long-term Investments - in the category of Investment held for more than a year.

e. Government securities - issued by government at all levels, e.g. development stock, bonds
etc, of long term nature

f. Company securities - issued by the private sector, seldom with higher rate of return, but
rather riskier than government securities, e.g. commercial papers, debentures, etc

g. Quoted Investments - these are listed on recognized stock exchanges like NSE, with
prices determined through the interaction of the forces of demand and supply, making it a
very reliable measure of the worth of the investment (market value).

h. Unquoted Investments - the market value cannot be readily ascertained, but the fair value
can be determined by the company directors at a given time. The fair value is the value
for which an asset could be exchanged between a knowledgeable willing seller in an
arm's length transaction.

Reasons for Holding Investment

1. Primary business of an enterprise, i.e. investment income being the only or main
source of revenue for the enterprise, hence known as an investment company.
2. Temporary surplus of an enterprise, this with no immediate use must be invested in
interest/income yielding assets, such as the types mentioned above.

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3. Future commitment, like a planned expansion project or redemption of debenture,
involving a substantial cash outflow; money or fund is set aside to meet the
commitment at the appropriate time.

Purchase/Sale Price of Investment

This can be Cum-dividend/interest and Ex-dividend/interest.

a. Cum-Dividend/Interest
Usually, Investments are bought cum-dividend/interest unless otherwise stated. This means
that the new owner is entitled to receive next income payment after the date of acquisition,
including some incomes relating to the period from the date dividend or interest was last paid
to the date of acquisition.

For example, assume Mr. A purchased N150,000 10% debenture cum-interest on 31/1/2009,
and interest is normally paid half yearly on 1/10 and 1/4. Mr. A will receive the next interest
on 1/4/2009 of N7,500 (1/2 x 10% x N150,000). This sum will include interest of N5,000
(4/12 x 10% x N150,000) from 1/10/2008 when interest was last paid to 31/1/2009, the date
of acquisition. It is assumed that the price of sale would have taken care of the apparent loss
of income for the seller.

In the book of Mr. A (investor), the pre-acquisition interest if N5,000 given up by the seller
shall be deducted from the cost of the investment, and when the interest of N7,500 is received
on 1/4/2009, only the post-acquisition interest of N2,500 shall be recognized as interest
income.

In the book of the seller, the pre-sale interest of N5,000 being given up by him shall be
deducted from the sale proceeds, thereby reducing the profit (or increasing the loss) on sale.
The same amount of N5,000 shall be recognized as interest income because the seller has
earned it even though; it is to be received by the investor.

b. Ex-Dividend/Interest
Investment can also be purchased in such a manner that the investor will be entitled to receive
the next income payment after the date of acquisition. This is sometimes the case when the
purchase takes place after the closure of the register of shareholders or debt-holders. It should
be noted that the investee (seller) will only pay interest or dividend to holders whose names
appear in the register at the due date of payment.

To allow time for the preparation of necessary documents for the payment, the register will
be closed sometimes before the due date. That is, if shares or debt are acquired after the
closure of register, the name of the new owners will not appear in the register at the due date
of payment. Thus, the income will be paid to the former owners. The income to be received
by the seller will include some for the period after he had ceased to be the owner (from the
period date of sale to the date of next income payment).

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For example, assuming on 1/3/08, Mr. A acquired N240,000 8% Govt development stock ex-
dividend in which interest is receivable quarterly on 31/3, 30/6, 30/9 and 31/12. Despite the
fact that Mr. A is now the owner of the stock, the next quarter's interest of N4,800 (3/4 x 8%
x N240,000) due on 31/3/08 will be received by the seller still. Mr. A is thus giving up the
portion of N1,600 for 1 month, in favour of the seller. Mr. A would therefore, ensure that,
during negotiation, the buying price is appropriately reduced to compensate him for the
interest lost.

In the books of the investor, Mr. A, the post-acquisition interest of N1,600 shall be added to
the cost of investments. The same amount shall be recognized as interest income as the
investor has earned it, even though it is to be received by the seller.

In the book of the seller, the post sale interest of N1,600 shall be added to the sale proceed
received thereby increasing the profits on sale and, when the interest of N4,800 is received in
31/3/08, only the pre-sale interest of N3,200 shall be recognized as interest income.

Note that Investment may be purchased or sold at:

i. Nominal value (at par)
ii. Premium (price above the nominal value)
iii. Discount (price below the nominal value)

Irrespective at which price the investment is bought or sold; interest or dividend is calculated
and paid on nominal value.

Also in the case of ordinary shares (with variable income), no adjustment is made for
dividend given up by the seller in a cum-dividend/interest purchase/sale or the buyer in an ex-
dividend/interest purchase/sale.

ACCOUNTING ENTRIES

FORMAT
Debenture of ABC Limited
Date Details Nominal Income Capital Date Details Nominal Income Capital
N N N N N N
C1 C2 C3 C4 C5 C1 C2 C3 C4 C5

Column 3 (Nominal) is a memorandum column recording the nominal value of the

investment (i.e. not part of the double entry). Column 4 (Income) is where the
interest/dividend received/earned on the investment is recorded. Column 5 (Capital) is for
recording the capital cost of the investment (including brokerage, charges, stamp duty and
other incidental costs relating to purchase of investment).

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Purchase of Investment

1. Purchase price (Cum-div.)

a. DR: Capital Column
CR: Cash Book
(For amount paid for the purchase)
b. DR: Nominal Column (Nominal Value of Investment)

2. Interest/Dividend given up by the seller in a cum-dividend/interest

DR: Income Column

CR: Capital Column
(For the interest/dividend from the date of last interest/dividend payment to the date
of purchase)

3. Interest/Dividend given up by the buyer in an ex-dividend/interest

DR: Capital Column

CR: Income Column
(For the interest/dividend from the date of purchase to the date of next interest or
dividend payment to the date of purchase)

4. Receipt of interest/dividend on investment

DR: Cash Book

CR: Income Column
(With amount received as interest/dividend)

ILLUSTRATION 1

Mercy Limited acquired 200,000 10% preference shares in ABC Ltd cum-dividend on
31/7/2007. Each of the preference shares has a nominal value of N1.00 but the purchase price
was N1.30. On 31/10/2007, Mercy Ltd received the dividend due for the year. Both the
investor and investee (seller) make up accounts to 31/10 annually. You are required to show
the investment account in the books of Mercy Ltd for the year ended 31/10/2007.

SOLUTION
10%Debenture of ABC Limited
date Details Nominal Income Capital date Details Nominal Income Capital
N N N N N N
31/7 Nominal 31/7
N1/purch Inc. Pre
N1.30 200,000 - 260,000 acquis - - 15,000
31/7 Cap. Pre- 31/10 Income - -
acquisit Rec’d
income 15,000 (Cash) 20,000 -
31/10 Inc. Pre- 31/10 Balance
acq (P/L) 5,000 c/d 200,000 245,000
200,000 20,000 260,000 200,000 20,000 260,000

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Workings
i. Dividend due for the year – 10% x 200,000 = N20,000
ii. Pre-acquisition dividend given up by seller = 20,000 x 9/12 = N15,000

ILLUSTRATION 2
As in Illustration 1 above, but purchase price was ex-dividend. You are required to show the
investment account in the books of Mercy Ltd for the year ended 31/12/2007.

SOLUTION
Note that the preference dividend up to 31/10/2007 would be received by the seller, rather
than Mercy Ltd.
10% Debenture of ABC Limited
date Details Nominal Income Capital date Details Nominal Income Capital
N N N N N N
31/7/07 Nominal 30/9/07 Capital 5,000
N1/purch
N1.30 200,000 - 260,000 31/12/07 Balance
31/9/07 Income 5,000 c/d 200,000 265,000
31/12/07 P & L 5,000
200,000 5,000 265,000 200,000 5,000 265,000

Workings
Post-acquisition dividend of N5,000 (N20,000 – 15,000 based on realization concept) realised
for period October – December, 2007 which increased the actual value of the capital to
N265,000

SALE OF INVESTMENT

This may be cum- dividend/interest or ex- dividend/interest.

In cum-dividend/interest sale, the buyer receives the next interest or dividend payment
following the date of sale. As with purchase, all sales are deemed to be cum-
interest/divividend, unless otherwise indicated.

Profit/Loss on Sale

When investments are sold, it is necessary to ascertain the Profit or loss on the sale. Where
the whole of the investments held are sold, the determination of the profit or loss is
straightforward. On the investment account, the P&L is simply the balancing figure in the
capital column.

However, when there is partial sale, some complications arise, particularly where the
investments were acquired at different dates. The sale proceed is adjusted by deducting
there-from the interest/dividend given up by the seller in a cum-interest/dividend sale and
adding thereto the interest/dividend given up by buyer in an ex-interest/dividend sale.

Where the adjusted sales proceed is higher than the cost of the investment sold, the difference
is profit on sale. Conversely, where the cost is higher than the adjusted sale proceeds,
the difference is loss on sale. The cost of the investment sold is determined on weighted cost
basis or FIFO basis.

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Weighted Cost Basis

This is computed and compared with the adjusted sales proceeds to determine the profit or
loss on the sale, following the process below:

a. Add up the entries in the capital columns before the entries for the sale and deduct the
total of the credit side from the total of the debit side (cost of investment in hand at
the date of sale)
b. Perform same process for the nominal columns to obtain the nominal value of the
investment on hand
c. Using the formula, obtain the weighted cost of the investment sold:
Cost of investment sold = Nominal value of investment sold
Nominal value of Investment on hand x Cost of
investment on hand
d. Adjust the sales proceed by deducting there-from the interest/dividend given up by the
buyer in an ex-dividend/interest Sale.
e. If the adjusted sale proceed is higher than the amount obtained in (c), the difference is
profit on sale, otherwise, a loss on sale, if the adjusted sale proceed is lower than the
amount.

FIRST-IN FIRST-OUT (FIFO) Basis

The cost of investment is determined on FIFO basis and compared with the adjusted sale
proceeds in order to determine the profit or loss on sale, as follows:
a. Determine the particular batch being sold or out of which sale is being made
b. If the identified batch was purchased cum- dividend/interest, the cost of the
investment is the total price paid minus the pre-acquisition dividend/interest gained at
the date of acquisition. On the other hand, if the investment was purchased ex-
dividend/interest, the cost of the investment is the total price paid plus the post-
acquisition dividend/interest given up at the date of acquisition.
c. Adjust the sale proceeds by deducting there-from the dividend/interest given up by the
seller in a cum dividend/interest sale or adding thereto the dividend/interest given up
by the buyer in an ex- dividend/interest Sale
d. If the adjusted sale proceeds is higher than the amount obtained in (b) above, the
difference is profit on sale, otherwise, it is a loss on sale.

ACCOUNTING ENTRIES

i. Sales Proceed received

DR: Cashbook
CR: Capital Column
Pass Nominal value to the credit side of nominal column

ii. Interest/dividend Given up by the seller in a cum-dividend/interest sale

DR: Capital Column

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 CR: Income
(With Income attributable to the period from the date income was last paid to the date
of sale)

iii. Interest/dividend Given up by the Buyer in an ex-dividend/interest sale

DR: Income Column
CR: Capital Column
(Income attributable to the period from the date of sale to the date of next income
payment)

iv. Recognition of Profit or loss on sale

DR: Capital Column/P&L
CR: P&L/Capital Column
(With profit/loss on sale respectively)

v. Receipt of next income on Investment (including income on investment sold ex-

dividend/interest)
DR: Cashbook
CR: Income Column

NB: (ii) and (iii) do not apply to sale of common stock (ordinary shares).

ILLUSTRATION 3 (Sale of shares held in whole cum-interest/dividend)

ABC Ltd acquired N300,000 10% debenture in Bright Ltd at 102 on 1st February 2009. On
31st March, 2009, ABC Ltd purchased additional N200,000 10% debenture in the same firm
at 97 ex-int. On 30th September, 2009, ABC Ltd sold the whole investment in hand at 105
cum-interest. Bright Ltd pays interest on the debenture half yearly on 1st January and 1st
July. All interest due were paid on due dates. The accounting year of ABC Ltd ends on 30th
November. You are required to show the investment account in the books of ABC Ltd for
year ended 30th November, 2009.

SOLUTION
ABC LIMITED
10% Debenture in Bright Limited
Date Details Nomin Income Capital Date Details Nominal Income Capital
al
N N N N N N
1/2/09 Cash102k 300,000 306,000 1/2/09 Inc [w1] 2,500
1/2/09 Capital w1 2,500 31/3/09 Cap [w2] 5,000
31/3/09 Cash 97k 200,000 194,000 1/7/09 Cash [w3] 15,000
31/3/09 Inc. [w3] 5,000 30/9/09 Cash [w4] 500,000 525,000
30/9/09 Inc. [w5] 12,500 30/9/09 Cap [w5] 12,500
30/9/09 Profit on
sale 10,000
30/11/09 P & L Acct 30,000
500,000 32,500 527,500 200,000 32,500 527,500

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Workings
1. Pre-acquisition interest (January 2009) given up by the seller in favour of ABC Ltd in
respect of the N300,000 debenture on 1/2/2009 (10% x 300000 x 1/12 = N2,500
2. Post-acquisition interest (April - June 2009) being forfeited by ABC Ltd in respect of
the N200,000 debenture on 31/3/2009 (10% x 200000 x 3/12 = N5,000
3. Interest received on 1/07/2009 (January – June 2009) in respect of the N300,000
debenture cum-interest on 1/2/2009 (10% x 300000 x 6/12 = N15,000
4. Proceeds of sales – N500,000 x 105k = N525,000
5. Accrued interest for July – Sept 2009, given up by ABC Ltd on the N500,000
debenture (Cum-dividend) sold – 10% x 500,000 x 3/12 = N12,500

ILLUSTRATION 4 (Partial sale of investment cum-interest/dividend)

From Illustration 3, suppose the details are same except that only N250,000 10% debenture
were sold at 105 on 30/9/2009 cum-interest. Show the Investment account in the books of
ABC Ltd for the year ended 30/11/2009.

SOLUTION
Calculating Profit/Loss on Sale using Weighted Cost Basis
ABC LIMITED
10% Debenture in Bright Limited
Date Details Nomin Income Capital Date Details Nominal Income Capital
al
N N N N N N
1/2/09 Cash102k 300,000 306,000 1/2/09 Inc w1 2,500
1/2/09 Capital w1 2,500 31/3/09 Cap w2 5,000
31/3/09 Cash 97k 200,000 194,000 1/7/09 Cash w3 15,000
31/3/09 Inc. [w3] 5,000 30/9/09 Cash w1 250,000 262,500
30/9/09 Inc. [w2] 6,250 30/9/09 Cap w2 6,250
30/9/09 Profit on 30/11/09 Bal c/d
sale w3 5,000 [w5] 250,000 10,417 251,250
30/11/09 P&L
Note/w5 34,167
500,000 36,667 516,250 500,000 36,667 516,250

Workings
1. Sales proceeds - N250000 x 105k = N262,500
2. Accrued interest (July – Sept 2009) given up by ABC Ltd on sale in Sept 2009
– 10% x 250,000 x 3/12 = N6,250
3. Calculation of Profit/Loss on Sale
Nominal Capital
=N= =N=
Sum of the debit entries before sale (300,000+200,000) 500,000
Sum of the debit entries before sale (306,000+194,000 + 5000) 505,000
Less: sum of the credit entries b/4 sale (2,500)
Nominal value/cost of investment in hand (30/9/2009) 500,000 502,500
Sales - N250,000 x 105k 262,500
Accrued interest given up by ABC Ltd (10%) (6,250)
256,250

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Less: Weighted cost of Deb. sold (250,000/500,000x502,500) 251,250
Profit on sale 5,000

4. Accrued interest on the remaining debentures of N250,000 from 1 st July to the

accounting year end, 30/11/2009 – 10% x N250,000 x 5/12 = N10,417

Note:
a. Interest earned on N300,000 purchased (10% x 300,000 x 5/12) – N12,500
Interest earned on the N200,000 purchased (10% x 200,000 x 3/12) – N3,000
Interest earned on the N250,000 sold (10% x 250,000 x 3/12) – N6,250
Accrued interest on the remaining debentures (N250,000 x 10% x 5/12) – N10,417
- N34,167
b. Value of N10,417 in the income column is the interest earned but yet to be received
for the period from 1/7/2009 – 30/11/2009

Calculating Profit/Loss on Sale using FIFO Basis

ABC LIMITED
10% Debenture in Bright Limited
Date Details Nomin Income Capital Date Details Nominal Income Capital
al
N N N N N N
1/2/09 Cash102k 300,000 306,000 1/2/09 Income 2,500
1/2/09 Capital w1 2,500 31/3/09 Capital 5,000
31/3/09 Cash 97k 200,000 194,000 1/7/09 Cash 15,000
31/3/09 Income 5,000 30/9/09 Cash 250,000 262,500
30/9/09 Income 6,250 30/9/09 Cap 6,250
30/9/09 Profit on 30/11/09
sale [w1] 3,333 Bal c/d 250,000 10,417 249,583
30/11/09 P&L
Note/w5 34,167
500,000 36,667 514,583 500,000 36,667 514,583

Workings
On FIFO basis, the N250,000 sold out of the N300,000 debenture, profit is calculated as:
Sale Proceeds N262,500
Less: Interest given up by ABC Ltd 6,250
256,250

Cost of Sales (250,000/300,000 x (306,000 - 2,500) (252,917)

3,333

ILLUSTRATION 5 (Sale of Whole Investment Ex- interest/dividend)

Etiebet Ltd acquired N400, 000 8% Delta State Govt Stock at par on 31/01/2017. On
31/05/2017, it purchased additional N200,000 stock ex-interest at 97. On 30/11/2017, Etiebet
Ltd sold the whole stock ex-interest at 103 to provide funds for the purchase of some
machinery. Interest is paid on the stock quarterly on 31/3, 30/6, 30/9 & 31/12. The

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accounting year of Etiebet runs from 1st January to 31st December and all interest due were
promptly paid.

You are required to show the investment account 8n the ledger of Etiebet Ltd for the year
ended 31st December, 2017

SOLUTION

Calculating Profit/Loss on Sale using FIFO Basis

8% Delta State Government Development Stock
Date Details Nomin Income Capital Date Details Nominal Income Capital
al
N N N N N N
31/1/17 Cashbook 400,000 400,000 31/1/17 Inco w1 2,667
31/1/17 Capital w1 2,667 31/3/17 Cash w2 8,000
31/5/17 Cash [w3] 200,000 194,000 31/5/17 Capital w4 1,333
31/5/17 Income [w4] 1,333 30/6/17 Cash w5 8,000
30/11/17 Capital w8 4,000 30/9/17 Cash w6 12,000
30/11/17 Profit 29,334 30/11/17 Cash w7 600,000 618,000
30/12/17 P&L 34,666 30/11/17 Income w8 4,000
31/12/17 Cash w9 12,000
600,000 41,333 624,667 600,000 41,333 624,667

Workings
1. Interest January (2017) given up by the Seller in favour of Etiebet Ltd on the
N400,000 stock purchased - 8% x 400000 x 1/12 = N2,667
2. Interest for Jan. to Mar. 2017 received on 31/3/2017 - 8% x 400,000 x 3/12 = N8,000
3. Amount paid for N200,000 stock purchased 31/3/17 - 200000 x 97k = N194,000
4. Interest for June given up by Etiebet Ltd IFO seller on 31/5/17 - 8% x 200000 x 1/12
= N1,333
5. Interest for April - June 2017 received 30/6/17 - 8% x 400,000 x 3/12 = N8,000
6. Interest for July - Sept 2017 received 30/9/17 - 8% x 200,000 x 3/12 = N12,000
7. Proceed of sale - 600,000 x 103k = N618,000
8. Interest for December, 2017 given up by buyer on sale of 30/11/17 ex-interest
- 8% x 600,000 x ½ = N4,000
9. Interest for Oct. to Dec. 2017 received 31/12/17 ex-interest - 8% x 600,000 x 3/12
= N12,000

ILLUSTRATION 6 (Partial sale of Investment Ex-dividend/interest)

The same details as in 5 above, except that only N250,000 stock were sold ex-int. @ 103 on
30/11/17. You are required to show the investment account in the ledger of Etiebet Ltd for
the year ended 31/12/2017.

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SOLUTION
Calculating Profit/Loss on Sale using Weighted Cost Basis
8% Delta State Government Development Stock
Date Details Nomin Income Capital Date Details Nominal Income Capital
al
N N N N N N
31/1/17 Cash at par 400,000 400,000 31/1/17 Income 2,667
31/1/17 Capital W1 2,667 31/3/17 Cashbook 8,000
31/5/17 Cash 200,000 194,000 31/5/17 Capital 1,333
31/5/17 Income 1,333 30/6/17 Cashbook 8,000
30/11/17 Capital (W2) 1,667 30/9/17 Cashbook 12,000
30/11/17 Profit (W3) 12,223 30/11/17 Cashbook W1 250,000 257,500
30/12/17 P & L a/c 36,999 30/11/17 Income (W2) 1,667
30/12/17 Cashbook 12,000
31/12/17 Bal c/d 350,000 345,722
600,000 41,333 607,556 600,000 41,333 607,556

Workings
1. Proceed of sale - N250,000 x 103k = N257,500
2. Interest for December 2017 given up by buyer for Etiebet on sale - 8% x 250,000 x
1/12 = N1,667

3. Calculation of Profit on sale

Nominal Capital
=N =N=
Sum of the debit entries before Sale (400,000+200,000) 600,000
Sum of the debit entries before Sale (400,000+190,000+1333) 595,333
Less: Sum of credit entries b/4 sale (2,667)
Nominal value/cost of investment In hand 30/11/2017 600,000 592,666
Sales Proceeds (W1) 257,500
Add: Interest given up by buyer (W2) 1,667
259,167
Less: Cost of Debenture sold (weighted) – 250,000/600,000x592666 246,944
Profit on sale 12,223

Calculating Profit/Loss on Sale using FIFO Basis

8% Delta State Government Development Stock
Date Details Nomin Income Capital Date Details Nominal Income Capital
al
N N N N N N
31/1/17 Cashbook 400,000 400,000 31/1/17 Inco w1 2,667
31/1/17 Capital w1 2,667 31/3/17 Cashbook 8,000
31/5/17 Cash [w3] 200,000 194,000 31/5/17 Capital 1,333
31/5/17 Income [w4] 1,333 30/6/17 Cashbook 8,000
30/11/17 Capital w8 1,667 30/9/17 Cashbook 12,000
30/11/17 Profit 10,834 30/11/17 Cashbook 250,000 257,500
30/12/17 P&L 39,999 30/11/17 Income 1,667
31/12/17 Cashbook 12,000
31/12/17 Bal c/d 350,000 344,332
600,000 41,333 606,167 600,000 41,333 606,167

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Workings
1. Proceed of sale (From Stock of 31/1/17) - N250000 x 103k = N257,500
Add: Interest given up by buyers for Etiebet 1,667
259,167
Cost of Stock sold (250,000/400,000) x (400,000-2667) 248,333
10,834

RIGHT ISSUES

A firm may make a right issue of ordinary shares to existing shareholders, usually at a lower
price than the market price, but higher than the nominal price or value. It is usually made in
proportion to existing holding.

An investor currently holding some of the existing shares in the investee firm has three
concurrent options when the provisional allotment is made. The investor has the option of
a. Taking up the rights
b. Selling the rights
c. Renouncing the rights.

ACCOUNTING ENTRIES OF INVESTOR FOR RIGHT ISSUE

1. Provisional allotment of right issue (no double entries)

2. Right shares Taken up
DR: Capital Column
CR: Cash Book (with the total sum paid)
DR: Nominal column with nominal value
3. Sale of Rights
DR: Cash book
CR: Capital Column (with the sum realised from the sale)
4. Renouncing of rights
No double entry necessary except the firm sells the renounced shares at a price above
the right price in which case the firm is legally bound to distribute the excess proceeds
to the investors:
DR: Cash book
CR: Capital Column (with the proceeds received)

ILLUSTRATION 7
ABC Ltd acquired 200000 ordinary shares of N1 each in Atlas Ltd at N1.40 each on
31/3/2009. On 30/9/09, the directors of Atlas Ltd made a right issue of 2 new shares for every
5 existing shares at a price of N1.80 per share, when the market price of the shares is N2.00.

The accounting year of the firm ends on 31st December. On 31st December 2009, the
directors of Atlas Ltd paid a dividend of 25k per share in issue at that date. You are required
to show the investment account in the ledger of ABC Ltd for the year ended 31/12/2009, if it:
a. Took up the Rights
b. Sold the rights for 10k per share, or
c. Renounced the right and Altas Ltd sold the shares to third parties at the market price
of shares as at 30/9/09.

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SOLUTION

a. ABC LIMITED took up the shares

Ordinary shares in Atlas Limited
Date Details Nomin Income Capital Date Details Nominal Income Capital
al
N N N N N N
31/3/09 Cashbook 200,000 280,000 31/12/09 cash w2 70,000
30/9/09 Cash w1 80,000 144,000
31/12/09 Profit/Loss 70,000 31/12/09 Bal c/d 280,000 424,000
280,000 70,000 424,000 200,000 70,000 424,000

Workings
1. No of right shares allotted to ABC Ltd - 2/5 x 200,000 shares = 80,000 shares
Upon taking up the right, ABC Ltd pays N144,000 (i.e. 80,000 x 1.80)
2. Dividend received on 31/12/2009 – 25k x 280,000 = N70,000

b. ABC LIMITED sold the rights

Ordinary shares in Atlas Limited
Date Details Nomin Income Capital Date Details Nominal Income Capital
al
N N N N N N
31/3/09 Cashbook 200,000 280,000 30/9/09 cash w1 8,000
31/12/09 Profit/Loss 50,000 31/12/09 cash w2 50,000
31/12/09 Bal c/d 200,000 274,000
280,000 50,000 280,000 200,000 50,000 280,000

Workings
1. Proceeds of sale of rights – 10k x 80,000 = N8,000
This is capital receipt against the cost of the existing shares therefore, credited to
capital column
2. Dividend received on 31/12/2009 – 25k x 200,000 shares = N50,000

c. ABC LIMITED renounces the rights

Ordinary shares in Atlas Limited
Date Details Nomin Income Capital Date Details Nominal Income Capital
al
N N N N N N
31/3/09 Cashbook 200,000 280,000 30/9/09 Cash (Note) 16,000
31/12/09 Profit/Loss 50,000 31/12/09 cash w2 50,000
31/12/09 Bal c/d 200,000 264,000
280,000 50,000 280,000 200,000 50,000 280,000

Note: The gain of N16,000 (80,000 x 2.00 – 1.80) is a Capital gain to the buyer, ABC Ltd,
credited to Capital Column to reduce cost of existing shares.

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BONUS ISSUES

A firm may make a bonus/script/capitalization issue to existing shareholders in proportion to

existing holding, as approved at the AGM, and the holders has no option than taking up the
issue. It is normally issues at par it is a means of capitalizing the reserves in lieu of cash
dividend. So no cash is paid.

ILLUSTRATION 8

Using same details in illustration 7 above, If ABC Ltd makes at bonus issue of 2:5 on
30/9/2009.

SOLUTION
ABC LIMITED
Ordinary shares in Atlas Limited
Date Details Nomin Income Capital Date Details Nominal Income Capital
al
N N N N N N
31/3/09 Cashbook 200,000 280,000 30/9/09 Cash [w2] 70,000
30/9/09 Bonus issue 80,000
31/12/09 Profit/Loss 70,000 31/12/09 Bal c/d 280,000 284,000
280,000 70,000 280,000 280,000 70,000 280,000

Workings
1. Bonus Issue = 2/5 x 200,000 = N80,000
2. Dividend received 31/12/09 = 280,000 x N0.25 = N70,000

VALUATION OF INVESTMENTS IN FINAL ACCOUNTS

Short-term investment should be valued at the lower of cost and market value. The carrying
amount should be determined on an item-by-item basis. The potential loss or unrealised loss
should be charged to the P&L account.

Long-term investment should be carried at cost regardless of fluctuations in the market value
except there is a permanent appreciation or diminution in the value of the investment, in
which case they should be revalued.

Appreciation connotes a prolonged and consistent increase in market value over the cost.
Otherwise, when there is a permanent decline in the market value compared to cost, it is
referred to as diminution in value.

Appreciation is credited as revaluation surplus to Owner's equity, while diminution is charged

against revaluation surplus rather than income.

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