Investment Accounting (AS 13) Concept With Journal Entries

What are Investment Accounts?

          As per Accounting Standard 13 the term investment refers to funds invested to earn some income. A business or firm may invest its money in various securities consisting of Govt. and semi Govt. loans, shares and debentures of companies, trust and municipalities etc. The accounts of investment are kept in the same way as the accounts of any other assets are maintained. A separate investment account should be maintained for recording transitions related to each kind of security and on the hand of the account mention the particulars like nature, dates when interest or dividends is due, the date of redemption etc.

What is Cum-Interest and Cum-Dividend Purchase and Sale?

         The quotation price is said to be cum-interest/dividend where it includes the dividend/interest not yet declared/received and the right of receiving dividend/interest being passed to the purchaser.

What is Ex-Interest and Ex-Dividend Purchase and Sale?

          The price is said to be ex-dividend/interest if it does not include the dividend not yet declared/received and the seller becomes entitled to receive it on its declaration.

What is Brokerage, Commission Expenses?

            When The securities are bought or sold through stock broker then a commission at a fixed percentage on the nominal value of securities bought or sold to be charged by the latter is known as brokerage or commission expenses.

Journal Entries:

(A)    When investments are purchased / sold at interest date:

(1)    In case of Purchase-

Investment A/c (actual)                                                                     Dr.

          To Bank A/c

(2)    In case of Sale-

Bank A/c (actual)                                                                                    Dr.

           To Investment A/c

(B)    When investment is purchased/sold not at interest date:

(1)    In case of Cum-Interest Purchase-

Invest A/c (Actual Cost)                                                                       Dr.

Interest A/c (Actual interest)                                                             Dr.

             To Bank A/c

(2)    In case of Cum-Interest Sale-

Bank A/c                                                                                                     Dr.

          To Invest A/c (Actual Cost)                                                     

          To Interest A/c (Actual interest)

(3)    In case of Ex-Interest Purchase-

Invest A/c (Quotation price+Brokerage)                                       Dr.

Interest A/c (Accrued interest)                                                         Dr.

             To Bank A/c

(4)    In case of Ex-Interest Sales-

Bank A/c                                                                                                     Dr.

          To Invest A/c (Quotation price-brokerage)                      

          To Interest A/c (Accrued interest)

(C)    For Profit/Loss on Sale:

(1)    In case of Profit-

Investment A/c                                                                                       Dr.

           To P & L A/C

(2)    In case of Loss-

P & L A/C                                                                                                   Dr.

           To Investment A/C

(D)   For Interest/Dividend Received:

Bank A/C                                                                                                            Dr.

          To Interest/Dividend A/C

(E)    Transfer of Dividend/Interest to P & L A/C

Interest/Dividend A/C                                                                                  Dr.

          To P & L A/C

(F)    For Depreciation on valuation of Closing Stock at market price:

P & L A/C                                                                                                           Dr.

           To Investment A/C

Illustration:

  Following are the transactions of Aang Ltd. during the year 2017-18

 • Started business with cash 100,000.

• Purchased 1st June: 1000 12% Bonds of A ltd of Rs. 10 at 15 ex-interest. Interest payable annually on 31st December

• 1st October: 2000 12% Bonds of Rs. 10 at 20 cum-interests. Interest payable annually on 31st December.

Show the Investment A/C in the books of Aang Ltd.

Solution:

Working Notes :

a     A)    1st June: (Ex-interest transaction)

• Nominal Value (NV) = 1000 *10 = 10,000

• Price (ex interest) = 15

• Cost Value (CV) = Price = 15*1000 = 15,000

• Interest = for five months on the NV = 12% of 10,000 = 500

 • Money payable = Price + Interest = 15,000 + 500 = 15,500

       

 b) 1st October (cum-interest transaction)

• NV = 2000 *10 = 20,000

• Price (ex interest) = 20 *2000 = 40,000

• Interest = for nine months on the NV = 12% of 20,000 for nine months = 1800

• CV = Price –Interest till date= 40,000 – 1800 = 38,200

• Money payable = Price = 40,000

       

c) 31st December (date of interest)

 • Interest on 30,000 for 12 months

• Interest = 12% of 30,000 = 3600

       

d) 31st March (date of closing the books)

• NV = 3000 *10 = 30,000

• Interest = for three months on the NV = 12% of 30,000 for three months = 900

 • CV = The balancing figure = 53,200

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 This are the main journal entries required to solve problems. If you dont find any adjustments here please comment below and visit again for past year's solved questions of CU BCOM.

                                                                                                                     

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Internal Reconstruction(Company Accounts) : Concept and Journal Entries.

What is Internal Reconstruction?

Internal Reconstruction refers to reconstruction of existing capital structure of the company to overcome financial difficulties. It is also termed as- 

1) Capital Reduction.

2) Capital Reconstruction.

      For internal reconstruction capital reduction is prepared and after getting approval of it from court as well as from creditors, it would be implemented.

Reasons :- 

1) Company has huge accumulated losses

2) Company's assets are overvalued.

3) Future of the company must be promising.

Journal Entries :-

1. Entry for share capital reduced without changing the face value of the shares-
 Share Capital A/c
       To Capital Reduction/Reconstruction A/c
2. Entry if face value of the shares is also changed on reduction of capital a new category of share capital is created :
Share Capital A/c (Old)
        To Share capital A/c (New)
        To Capital reduction A/c
3. Entry where rate of dividend on preference shares is changed under the scheme of reconstruction: Preference Share Capital A/c (OLD)
        To Preference Share Capital A/c (New)
4.  Entry When debenture holder and creditors are also ready to reduce their claim against company: Debenture A/c
Creditors A/c
         To Capital reduction A/c
5. Entry in case of appreciation in the value of any asset:
 Assets A/c
         To Capital reduction A/c
6. Entry if any contingent liability matures and is to be paid immediately the following entry is passed:
 Capital reduction A/c
          To Liability payable A/c
          To Bank A/c
7. Entry for utilizing the amount of capital reduction to w/o accumulated losses.
   Capital Reduction A/c
          To Profit & Loss A/c
          To Preliminary Expenses A/c
          To Discount on Shares /Debentures A/c
          To Goodwill A/c
          To Trade Assets A/c
          To Patents/Copy rights
          To Assets A/c
8. For transferring any balance left in the capital reduction account to capital reserve account:
  Capital reduction a/c Dr. (with the balance left)
           To capital reserve a/c
9. For extinguishing or reducing the uncalled liability of the member:
 Equity Share Capital A/c
         To Equity share Capital A/c
10. For writing off the part of paid up capital which is lost in operation or which is not representing by available assets:
  Equity Share Capital A/c
         To Equity Share Capital A/c
         To Capital Reduction A/c
11. If the face value of shares remain unchanged
     Equity Share Capital A/c
          To Capital Reduction A/c
12.  For reducing the capital by returning the excess capital:
     Equity Share Capital A/c
          To Equity Share Capital A/c
          To Equity Shareholders A/c
13. For payment to Shareholders
  Equity Shareholders A/c
         To Bank A/c
14. For uses of Capital reduction A/c
 Capital Reduction A/c
         To Accumulated Losses A/c
         To Goodwill A/c
         To Fictitious Assets A/c
         To Other Assets A/c
         To Capital Reserve A/c( Balancing Figure)

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This are the main journal entries required to solve problems. If you dont find any adjustments here please comment below and visit again for past year's solved questions of CU BCOM. 

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