Investments are assets held by an enterprise (other than held as ‘Stock-in-trade’) for earning income by way of dividends, interest and rentals, for capital appreciation, or for other benefits to the investing enterprise.
Investment Property : Investment in land and buildings are those that are not intended to be occupied for use by or in the operations at the investing enterprise.
Classification of Investments
As per As-13, Investment have been classified into following categories:
- Current Investment – These are readily realizable and intended to be held for not more than one year from the date on which such investment is made. The valuation method of such investment as follows:
- Fair value: It is the amount for which an asset could be exchanged between a knowledgeable willing buyer and a knowledgeable willing seller, in an arm’s length transaction. Under appropriate circumstances, market value or net realizable value provides an evidence of fair value.
- Market value: It is the amount obtainable from the sale of an investment in an open market, net of expenses necessarily to be incurred on or before disposal.
- Long Term Investment – A long-term investment is an investment other than a current investment.
Cost of Acquisition of Investment
- The cost of an investment includes acquisition charges such as brokerage fees and duties.
- If an investment is acquired by the issue of shares or other securities, the acquisition cost is the fair value of the securities issued.
- The fair value may not necessarily be equal to the nominal or par value of the securities issued.
- If an investment is acquired in exchange, or part exchange, for another asset, the acquisition cost of the investment is determined by reference to the fair value of the asset given up. It may be appropriate to consider the fair value of the investment acquired if it is more clearly evident.
A separate Investment Account should be made for each scrip purchased. The scrips purchased may be broadly divided into two categories as follows:
- Fixed income bearing scrips and
- Variable income bearing scrips.
Accounting Treatment of Acquisition
The entries in Investment Account for these broad categories of scrips will be made as:
- Fixed Income Bearing Securities,
- Variable Income Bearing Securities.
Fixed Income Bearing Securities
The investment in Government securities or debentures comes under this category. In this type of scrip, the interest accrued from the date of last payment to the date of transaction can be easily calculated. In case the transaction is on ‘Ex-interest’ basis i.e., the amount of interest accrued to the date of transaction has to be paid in addition to the price of security.
The following entries are made in the books of Purchaser:
- On Ex-Interest Basis:
Debit: Amount of price settled on ex-interest basis is entered in the Capital Column.
Debit: Interest accrued to the date of transaction in the Income Column.
- On Cum-Interest Basis:
A part of purchase price is related to the interest accrued from the date of the last interest paid to the date of transaction. So, the cost of investment has to be calculated by subtracting the amount of accrual interest from the Purchase Price.
Debit: the interest accruing from the date of last payment to the date of purchase is entered in the Income Column.
Debit: balance i.e., Purchase Price-Interest Accrued, in the Capital Column.
When the interest amount is actually received, it is entered in the Income Column credit side. So, only the interest arising between the date of purchase and the one on which it next falls due will be credited to Income account.
- Interest amount is calculated with respect to nominal value
- Unless specified, the price will be treated as ex-interest.
Variable Income Bearing Securities
The investment in equity shares comes under this category. The following aspects are to be taken into consideration:
- Bonus Shares: If bonus shares have been received by the investor, it will increase share holding without incurring any additional cost and will be shown in nominal column only. Therefore, average cost per share will reduce after bonus issue. Cost of closing balance of investment will be calculated at the reduced cost.However, on sale of bonus shares total sale proceeds will be treated as profit.
- Right Shares: The cost of the right shares is added to the carrying amount of the original holding.
Treatment in Investment Account:
- When investor subscribes for right shares i.e. receives on the basis of existing holding, nominal value is reconciled in the nominal column and the amount paid is in the cost column.
- In case of purchase of right from others, the total amount paid is entered in the cost column on debit side.
- Dividends: Dividend received by the investor will normally be treated as income and will be shown in the income column in Investment Account. Dividend has been received for pre-acquisition period; such dividend will be treated as capital receipt and shown in the ‘principal’ column. Consequently, cost of investment will be reduced. For shares purchased cum-dividend, dividend received subsequently will be deducted from the cost purchase by the amount of dividend. It is difficult to make an allocation between pre and post acquisition periods. The cost of investment is normally reduced by dividends receivable, if they clearly represent recovery of part of cost.
Point to be noted: The following points should be noted with respect to investment in equity shares:
- As per AS 9, dividends from investments in shares are not recognized in the statement of profit and loss until a right to receive payment is established;
- The amount of dividend accruing between the date of last dividend payment and the date of purchase cannot be immediately ascertained;
- The dividend received for a particular period of time is assumed to be evenly distributed over the period.
Accounting entries in the books of investor at the time of purchase:
Debit: The Capital column of the Investment Account by the entire purchase price.
Credit: The Capital column of the Investment Account by the amount of dividend for the period for which the investor did not hold the share as it should not be treated as revenue receipt but they as capital receipt.
Income from Investment
- Interest, dividends and rentals receivable from investment are generally regarded as income, being the return on the investment.
- However, in some circumstances, such inflows may represent a recovery of cost and not form part of income. In such case, the cost of investment is normally reduced by dividends receivable.
Carrying amount of Investments
- Current Investments: The carrying amount for current investments is the lower of cost and fair value. Any reduction to fair value and any reversals of such reductions are included in the Profit & Loss Statement.
- Long-term Investments: Long-term investments are usually carried at cost.
- Where there is a decline, other than temporary, in the carrying amounts of long term investments, the resultant reduction in the carrying amount is charged to the profit and loss statement.
- Any reduction in the carrying amount of investment and any reversals of such reductions should be charged or credited to the profit and loss account by giving respective debit or credit to Investment A/c (Capital Column).
- Indicators: Factors which indicate whether a decline is temporary or otherwise are:
- Its market value;
- The investee’s assets and results;
- The expected cash flows from the investment; and
- The type and extent of the investor’s stake in the investee are also taken into account.
Carrying Amount of Investments
Ex. In preparing the financial statements of K Ltd. for year ended 31st March, 2010, you come across the following information.
An unquoted long term investment is carried in the books at a cost Rs. 3 lakhs. The published accounts of the unlisted company received in May, 2010 showed that the company was incurring cash losses with declining market share and the long term investment may not fetch more than Rs. 1,00,000.
State with reasons, how you would deal with them in the financial statements:
Solution: Investments classified as long term investments should be carried in the financial statements at cost. However, provision for diminution shall be made to recognize a decline, other than temporary, in the value of the investments, such reduction being determined and made for each investment individually. So, a provision for diminution should be made to reduce the carrying amount of long term investment to Rs. 1, 00,000 in the financial statements for the year ended 31st March, 2010.
Disposal of Investments
On disposal of an investment, the difference between the carrying amount and the disposal proceeds, net of expenses is recognized in the profit and loss statement. When a part of the holding of an individual investment is disposed, the carrying amount is required to be allocated to that part on the basis of the average carrying amount of the total holding of the investment.
In respect of shares, debentures and other securities held as stock-in-trade, the cost of stocks disposed of may be determined by applying an appropriate cost formula (e.g. first-in-first-out, average cost, etc as specified in AS 2, ‘Valuation of Inventories’).
Fixed Income Bearing Securities
The term signifies that it carries a fixed rate of income. The amount of accrued interest from the date of last payment to the date of sale is credited in the income column and only the sale proceeds, net of accrued interest, is credited in the capital column of investment account. For example, Investment in Govt. bonds, Debentures etc.
In case of the transaction on ‘Ex-interest’ basis, entire sale proceeds is credited in the capital column and the amount of accrued interest from the date of last payment to the date of sale, separately received from the buyer, will be taken to the credit side of the income column of investment account.
Variable Income Bearing Securities
In case of these securities, the entire amount of sale proceeds should be credited in the capital column of investment account, unless the amount of accrued dividends can be specifically established. For example, Equity shares.
When rights are not subscribed for but are sold in the market, the sale proceeds are taken to the profit and loss statement and the price received is credited to cost column but nothing should be entered in the nominal column on credit side. However, where the investments are acquired on cum-right basis and the market value of investments immediately after their becoming ex-right is lower than the cost at which they were acquired, the sale proceeds of rights may be applied to reduce the carrying amount of such investments to the market value.
Points to be remembered:
- A cum-interest price includes the interest accrued up to the date of transaction. Cum means inclusive of interest. Cum interest market value = Payment for Principal or Capital amount + Accrued interest upto the date of transaction.
- Ex-interest means payment for Principal or Capital amount but excludes payment for any accrued interest.
- The profit or loss on sale of investment is transferred to profit & loss account. It may be calculated for each individual transaction of sale or find out by closing the cost column of the Investment A/c at the end of the accounting year.
- If market price is lower than the cost, there will be a further loss in the capital column (cost – market value).
Ex. Mr. Roy acquires 100 shares of a company on cum-right basis for Rs.25,000. He subsequently receives an offer of right to acquire fresh shares in the company in the proportion of 1:1 at Rs.110 each. Mr. Roy subscribes for the right issue. Thus, the total cost of Roy’s holding of 200 shares would amount to Rs. [25,000 + (100 x Rs.110)] = Rs.36,000.
Suppose, he does not subscribe but sell the rights for Rs.7,500. The ex-right market value of 100 shares bought by Mr. Roy immediately after the rights falls to Rs.20,000.
In this case out of sale proceeds of Rs.7,500 may be applied to reduce the carrying amount of such investments to the market value or
Out of sale proceeds of Rs.7,500, Rs.5,000 may be applied to reduce the carrying amount to the market value Rs.20,000 and Rs.2,500 would be credited to the profit and loss account.
Accounting Procedure for Investment
Investment in Debentures or Bonds
- Rate of Purchase/Sale (Cum-Interest and Ex-Interest price)
Debentures and Bonds carry fixed rate of interest payable on specific dates. Company pays interest to the security holder on the date when interest becomes due. Therefore, interest price of security may be cum-interest or ex-interest. Cum-interest prices include interest for the period for which seller is entitled. Price of securities less interest is treated as cost of investment.
Ex. P purchased from Q 500, 17% Debentures of ABC Ltd. @ Rs.95/- Cum-Interest, on 1.6.2010. Interest is payable on 30th June and 31st December each year. Record this transaction in the books of P and Q.
Solution: Debentures have been purchased on 1.6.2010. Previous interest must have been paid on 31.12.2009. Therefore, seller is entitled for interest for 5 months i.e. from 1.1.2010 to 31.5.2010. This interest is included in the cum-interest price of Rs.95. Allocation between cost and interest will be as under:
|Total price to be paid: (500 x Rs. 95)||47,500|
|Less: Interest: (50,000 x 17% x 5/12)||3,542|
|Cost of Investments||43,958|
|Books of P (Purchaser)||Rs.||Rs.,|
|Investment in 17% Debentures of ABC Ltd. A/c Interest on Investment A/c To Bank A/c||Dr. Dr.||43,958 3,542||47,500|
|Books of Q (Seller)|
|Bank A/c To Investment in 17% Debentures of ABC Ltd. To interest on Investment A/c||Dr.||47,500||43,958 3,542|
In case of Ex-Interest, in addition to price, purchaser will pay interest to the seller. The amount of interest will be same. If in the above example price of Rs.95 is ex-interest, calculation and entry will be as under:
|Total price to be paid: (500 x Rs. 95)||47,500|
|Add: Interest: (50,000 x 17% x 5/12)||3,542|
|Total Amount Paid||51,042|
|Books of P (Purchaser)||Rs.||Rs.,|
|Investment in 17% Debentures of ABC Ltd. A/c Interest on Investment A/c To Bank A/c||Dr. Dr.||47,500 3,542||51,042|
|Books of Q (Seller)|
|Bank A/c To Investment in17% Debentures of ABC Ltd. To interest on Investment A/c||Dr.||51,042||47,500 3,542|
Unless specified, price is treated as Ex-interest.
- Expenses/Brokerage on Purchase/Sale
Amount of expenses or brokerage paid on purchase of security will be added to cost of investment and paid in case of sale it will be subtracted from sale proceeds. If brokerage is paid as a percentage, it may be calculated either on nominal or cost as mentioned.
Ex. A purchased on 1st March, Rs.25,000 5% AK Co. Debentures Stock at 90 cum-interest, interest being payable on 31st March and 30th September each year, Stamp and expenses on purchase amounted to Rs.20 and brokerage at 2% was charged on cost; interest for the half-year was received on the due date.
On 1st September, Rs.10,000 of the stock was sold at 92 ex-interest less brokerage at 2%.The market price of stock on 31st December was 90%. Show the cost and selling price of the investment considering the brokerage and expenses.
1. Computation of Cost Price and Interest on debentures purchased on Mar.1
|Purchase price (250 x Rs.90) Less: Int. for 5 months @ 5% (from Prev.30th Sept.- 1st March) Add: Exp. on Stamp & Brokerage [20 + (22,500 x 2%)]||22,500 520|
2. Computation of Selling Price and Interest on debentures sold on Sept. 1
|Selling Price of debentures (100 x Rs.92) Less: Brokerage (9,200 x 2%) Net Selling Price||9,200 184|
Interest on Debenture (31st March – 1st Sept.) = 10,000 x 5% x 5/12 = Rs.208
3. Computation of profit/loss on sale of debentures
Profit/loss on sale of deb. On Sept. 1
|Net selling price of debentures Less: Cost Price (22,450/25,000 x 10,000) Profit||9,016 8,980|
4. Valuation of Investment at the year end (Average Cost Basis)
Nominal value of investment at the year end = Rs.(25,000 – 10,000)= Rs.15,000
Total purchase price of investment = Rs.22,450
Valuation of investment at the year end = Rs.22,450 /25,000 x 15,000 = Rs.13,470
Market price of investment at the year end = Rs.15,000 x 90% = Rs.13,500.
Costs being lower than the market value, the debentures are carried forward at cost i.e.; Rs.13,470.
- Accrued Interest on Opening Balance
If due date of interest payment and closing date of the books are different, opening balance of accrued interest will be calculated and will be shown in the interest column in Investment Account.
- Tax deducted at Source
If income tax has been deducted on payment of interest by company, net amount received in cash will be reduced by the amount of tax deducted from the gross amount of interest received.
Ex. Mr. Roy holds Rs.1,00,000 (Nominal value) 17% Bonds at a cost of Rs.95,000. On 31st March, interest for six months has been received. Tax deducted at source @ 15%. Show journal entry for receipt of interest.
|Gross Interest (1,00,000 x 17% x 6 /12)||Rs. 8,500|
|Less: Tax at source @ 15%||Rs. 1,275|
|Net Amount Received||Rs. 7,225|
Journal entry on receipt of interest:
Bank A/c Dr. 7,225
Tax Deducted at Source A/c Dr. 1,275
To Interest on Investment A/c 8,500
- Accrued Interest on closing Balance
Interest accrued upto date of closing the accounts books will be disclosed in Interest column as closing balance.
- Convertible Debentures
Where a part of debentures has been converted, cost of debentures converted will be credited in Investment Account. A separate account of investment in shares will be opened and such cost will be debited in ‘Investment in shares A/c’. Interest on debentures due upto date of conversion will be credited in interest column.
Closing of Investment Account
- Nominal Column: At the closing date, the balance of this column shows the nominal value of investments in hand.
- Cost Column: This column shows the cost of investment in hand.
- Long term investment is valued at cost
- Current investments should be valued at the lower of cost or market price. Cost for this purpose may mean, average cost, cost on FIFO basis or on LIFO basis.
- Income Column: The balance of this column shows income from investments during the accounting period and transferred to profit and loss A/c.
Ex. Bonanzaa Ltd. held on 1st April, 1993 Rs.2,00,000 of 9% Government Loan (2003) at Rs.1,90,000 (Face Value of Loan Rs.100 each). Three month’s interest had accrued on the above date.
On 31st May, 1993 the company purchased the same Government loan of the face value of Rs.80,000 at Rs.95 (net) cum-interest.
On 1st June, 1993, Rs.60,000 face value of the Loan was sold at Rs.94 (net) ex-interest.
Interest on the loan was paid each year on 30th June and 31st December and was credited by the bank on the same date.
On 30th November, 1993 Rs.40,000 face value of the loan was sold at Rs.97 (net) cum-interest.
On 1st December, 1993 the company purchased the same loan Rs.10,000 at par ex-interest.
On 1st March, 1994 the company sold Rs.10,000 face value of the loan at Rs.95 ex-interest. The market price of the loan on 31st March, 1994 was Rs.96.
Draw up the 9% Government Loan (2003) Account in the books of Bonanzaa Limited. First in first out method shall be followed and the balance of the loan held by the company shall be valued at total average cost or market price whichever is lower. Calculation shall be made to the nearest rupee or multiple thereof.
Solution: Steps involved solving the above problem-
- Computation of Interest on investment.
- Computation of profit/loss on sale of 9% Govt. Loan.
- Computation of cost of closing balance of 9% Govt. Loan (on FIFO basis).
- Preparing Investment account of 9% Govt. Loan (2003).
1) Computation of Interest on investment
|Apr. 1 May 31 June 1 June 30 Nov. 30 Dec. 1 Dec. 31 Mar. 1||On Rs.2,00,000 for 3 months @ 9% p.a. On Rs.80,000 for 5 months @ 9% p.a. On Rs. 60,000 for 5 months @ 9% p.a. On Rs.(2,00,000 + 80,000 – 60,000) = Rs.2,20,000 for 6 months @ 9% p.a. On Rs.40,000 for 5 months @ 9% p.a. On Rs.10,000 for 5 months @ 9% p.a. On Rs.(2,20,000 – 40,000 + 10,000) = Rs.1,90,000 for 6 months @ 9% p.a. On Rs.10,000 for 2 months @ 9% p.a.||4,500 3,000 2,250 9,900 1,500 375 8,550 150|
2) Computation of profit/loss on sale of loan
- Profit/loss on sale of loan on 1.06.93:
|Selling price of loan (600 x Rs.94) Less: Cost price of loan Rs.(1,90,000 x 60,000/2,00,000) loss on sale of loan investment||56,400 57,000|
- Profit/loss on sale of loan on 30.11.93:
|Selling price of loan (400 x Rs.97) Less: Interest [Wn.1] Less: Cost price of loan Rs.(1,90,000 x 40,000/2,00,000) loss on sale of loan investment||38,800 1,500|
- Profit/loss on sale of loan on 1.03.94–
|Selling price of loan (100 x Rs.95) Less: Cost price of loan Rs.(1,90,000 x 10,000/2,00,000)||9,500 9,500|
Therefore, total loss on sale = Rs. (600 + 700) = Rs.1,300. Loss on Investment can be shown individually in respect their date as shown in previous example or the total loss can be shown In Investment A/c at the end of the year.
3) Computation of cost of closing balance of 9% Govt. Loan (on FIFO basis)-
The face value of balance of 9% Govt. Loan as on 31.3.1994 is Rs.1,80,000. The cost of 9% Govt. Loan as on 31-3-1994 is arrived at as per FIFO basis as below:
|Nominal Value Rs.||Actual Value Rs.|
|Balance out of opening stock of 9% Govt. Loan Balance out of May, 1993 purchase Balance out of Dec., 1993 purchase||90,000 80,000 10,000||85,500 73,000 10,000|
Market price of 9% Govt., Loan @ Rs.96 per unit = (1,800 x Rs.96) = Rs.1,72,800
Cost being lower, the closing balance of 9% Govt. Loan valued at cost.
Interest accrued on Rs.(1,80,000 @ 9% for 3 months) = (1,80,000 x 9/100 x ¼ )= Rs.4,050.
|4)||In the books of Bonazza Ltd. 9% Government Loan (2003) Account|
|Date||Particulars||Nominal Rs.||Interest Rs.||Principal Rs.||Date||Particulars||Nominal Rs.||Interest Rs.||Principal Rs.|
|April1||To Balance b/d||2,00,000||4,500||1,90,000||June 1||By Bank A/c||60,000||2,250||56,400|
|May 31||To Bank A/c||80,000||3,000||73,000||June 30||By Bank A/c [wn.1]||9,900|
|Dec.1||To Bank A/c||10,000||375||10,000||Nov. 30||By Bank A/c||40,000||1,500||37,300|
|1994 Mar.31||To Income||Dec. 31||By Bank A/c [Wn.1]||8,550|
|Investment A/c (Bal.fig.)||18,525||Mar. 1 Mar.31||By Bank A/c By Profit & Loss A/c (loss||10,000||150||9,500|
|on sale) [Wn.2]||–||–||1,300|
|Mar.31||By Balance c/d [wn.3]||1,80,000||4,050||1,68,500|
Bonus & Right share receipt & transfer of Right, Average Cost
Ex. On 1.4.96, Sundar had 25,000 equity shares of ‘X’ Ltd. at a book value of Rs.15 per share (Face value Rs.10). On 20.6.96, he purchased another 5,000 shares of the company at Rs.16 per share. The directors of ‘X’ Ltd. announced a bonus and rights issue. No dividend was payable on these issues. The terms of the issue are as follows:
Bonus basis 1 : 6 (Date 16.8.96)
Rights basis 3 : 7 (Date 31.8.96) Price Rs.15 per share.
Due date for payment 30.9.96
Shareholders can transfer their rights in full or in part. Accordingly Sundar sold 33.33% of his entitlement to Sekhar for a consideration of Rs.2 per share.
Dividends for the year ended 31.3.96 at the rate of 20% were declared by X Ltd. and received by Sundar on 31.10.96. Dividends for shares acquired by him on 20.6.96 are to be adjusted against the cost of purchase.
On 15.11.96, Sundar sold 25,000 equity shares at a premium of Rs.5 per share.
You are required to prepare in the books of Sundar’s:
- Investment Account
- Profit & Loss Account.
For your exercise, assume that the books are closed on 31.12.96 and shares are valued at average cost.
[CA Inter, May ‘97]
Solution: Steps involved in solving the above problem-
- Computation of no. of Bonus Shares and Right Shares issued by X ltd.
- Computation of Dividend.
- Valuation of Closing Stock on Average cost basis.
- Preparation of Investment Account in the books of Sundar.
- Preparation of Profit & Loss Account in the books of Sundar.
1) Computation of no. of Bonus Shares and Right Shares issued by ‘X’ Ltd.
- Bonus Shares = (25,000 + 5,000)/6 = 5,000 Shares
- Right Shares = [(25,000 + 5,000 + 5,000) x 3/7] = 15,000 shares
- Right Shares Renounced (Sundar sold 33.33% of his entitlement to Sekhar) = (15,000 x 33.33%) = 5,000 shares.
So, No. of Rights Shares obtained by Sundar = (15,000 – 5,000) = 10,000 shares
2) Computation of Dividend
- Dividend Received = [(25,000 x Rs.10) x 20%] = Rs.50,000
- Dividend on share purchased on 20-6-96 is adjusted to Investment A/c = [(5,000 x Rs.10) x 20%]= Rs.10,000.
3) Valuation of Closing Stock on Average cost basis
Cost of shares on 31.12.96 = [(3,75,000 + 80,000 + 1,50,000 – 10,000 – 10,000) x 20,000 / 45,000] = Rs.2,60,000
|4)||In the books of Books of Sundar Investment Account (Equity Shares in X Ltd.)|
|1.4.96||To Balance b/d||25,000||3,75,000||30.9.96||By Bank [5,000 Rights shares sold @ Rs. 2 per share]||10,000|
|20.6.96||To Bank A/c||5,000||80,000||30.10.96||By Bank A/c (Divd. On share acquired on 20.6.96) [Wn.2]||10,000|
|16.8.96||To Bonus||5,000||–||15.11.96||By Bank [Sale of 25,000 shares @ Rs. 15 per share]||25,000||3,75,000|
|30.9.96||To Bank A/c (Rights shares @ Rs. 15 per share) [Wn.1]||10,000||1,50,000|
|15.11.96||To Profit & Loss A/c (Profit transferred)||–||50,000||31.12.96||By Balance c/d (Wn.3)||20,000||2,60,000|
|5)||Profit & Loss A/c|
|To Balance c/d||1,00,000||By Investment A/c (Profit Transferred) By Dividend (Wn.2)||50,000 50,000|
Investment with Bonus receipt, brokerage cost
Ex. On 1.4.2002, Mr. Krishna Murthy purchased 1,000 equity shares of Rs.100 each in TELCO Ltd. @ Rs.120 each from a Broker, who charged 2% brokerage. He incurred 50 paise per Rs.100 as cost of shares transfer stamps. On 31.1.2003 Bonus was declared in the ratio of 1:2. Before and after the record date of bonus shares, the shares were quoted at Rs.175 per share and Rs.90 per share respectively. On 31.3.2003 Mr. Krishna sold bonus shares to a Broker, who charged 2% brokerage.
Show the Investment Account in the books of Mr. Krishna Murthy who held the shares as current assets and closing value of investments shall be made at Cost or Market value whichever is lower.
Solution: Steps followed in solving the above problem-
- Computation of cost of equity shares purchased on 1.04.02.
- Computation Bonus share and selling price of bonus shares sold on 31.03.03.
- Computation of profit/loss on sale of bonus shares.
- Valuation of equity shares held on 31.03.03.
- Preparation of Investment A/c.
1) Computation of cost of equity shares purchased on 1.04.02
|Cost of Equity Shares (1,000 x Rs 120) Add: Brokerage (2% of Rs.1,20,000) Cost of shares transfer stamps (0.50/100 x 1,20,000) Total cost of Equity Shares||1,20,000 2,400 600|
2) Computation of Bonus share and selling price of bonus shares sold on 31.03.03
|Bonus share [(1,000 x ½) x Rs.100]||50,000|
|Selling Price of Bonus Shares (500 x Rs.90) Less: Brokerage (2% of Rs.45,000) Net Selling price of Bonus Shares||45,000 900|
3) Computation of Profit/loss on sale of bonus shares
|Sale proceeds (Note-2) Less: Average cost [Note] Profit on sale||44,100 41,000|
|Nominal value of total shares including bonus (1,00,000 + 50,000)||Rs.1,50,000|
|Cost of 1,000 equity shares||Rs.1,23,000|
|Therefore, Average cost of bonus shares [(1,23,000 x 50,000) / 1,50,000]||Rs.41,000|
4) Valuation of equity shares held on 31.03.03
|Cost Rs (1,23,000 x 1,00,000/1,50,000)||Rs.82,000|
|Market Value = (1,000 shares x Rs.90)||Rs.90,000|
|Closing balance has been valued at Rs.82,000 being lower than the market value.|
|5)||In the Books of Mr. Krishna|
|For the year ended 31st March, 2003|
|Date||Particulars||Nominal Rs.||Amount Rs.||Date||Particulars||Nominal Rs.||Amount Rs.|
|1.4.02||To Bank A/c [Wn.1]||1,00,000||1,23,000||31.3.03||By Bank A/c [Wn.2]||50,000||44,100|
|31.3.03||To Bonus shares [Wn.2]||50,000||–||31.3.03||By Balance c/d [Wn.4]||1,00,000||82,000|
|31.3.03||To Profit & Loss A/c [Wn.3]||–||3,100|
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