9.
Investment Accounts
Introduction
What are investments?
Assets held by an enterprise for earning income by way of dividends, interest and rentals, for capital appreciation or other benefits to the
enterprise.
What is the point of view for investment accounting?
To be treated from the point of view of investor.
Classification of Investments
What are current investments?
Investment readily reliable and intended to be held not more than for one year.
What is the carrying amount for current investments?
Lower of cost and fair value.
What is the treatment for pre acquisition interest?
Deducted from cost of investment.
What is fair value?
Amount for which an asset could be exchanged between knowledgeable and willing buyer and seller in an arm's length price.
What is market value?
Amount obtainable from sale of an investment in an open market, net of expenses to be incurred on disposal.
What are long term investments?
Investment other than current investments, carried at cost.
What is the treatment for change in the value of long term investments?
If decline other than temporary, carrying amount is reduced, decline charged to P&L statement.
If increase in carrying amount, reduction in carrying amount is reversed first.
Cost of Investments
What is the cost of an investment?
Acquired for cash.
Cash price including brokerage, fees and duties.
Acquired for securities.
Fair value of securities.
Acquired in exchange of another asset.
Fair value of asset or investment, whichever is clearly evident.
What are fixed income bearing securities?
Securities having fixed return of income. Investment in Government securities or debentures comes under this category.
What is the accounting treatment if fixed income bearing securities are issued on ex-interest basis?
Dr: Investment a/c
9. Investment Accounts 1
With the price settled on ex-interest basis.
Dr: Interest accrued a/c
Accrued interest till the date of transaction.
Cr: Bank a/c
Total amount paid.
What is the accounting treatment if fixed income bearing securities are issued on cum-interest basis?
Dr: Investment a/c
With the price settled on cum-interest less Interest Accrued.
Dr: Interest accrued a/c
Accrued interest till the date of transaction.
Cr: Bank A/c
With total amount paid.
What is the general assumption if nothing about investment is specified?
Assumed to be on ex-interest basis.
What are variable income bearing securities?
Securities having variable return of income. Investment in equity shares comes under this category.
What is the accounting treatment for variable income bearing securities?
For investment made.
Dr: Investment a/c
With the entire purchase price.
Cr: Bank a/c
With total amount paid.
For dividend received.
Dr: Bank a/c
With total dividend received.
Cr: Investment a/c
With the amount of dividend for the period for which the investor did not hold the share.
Cr: Dividend a/c
With the amount of dividend for the post–acquisition period.
When shall dividend on shares be recognized?
When right to receive payment is established.
What is the treatment for dividend acquired for pre acquisition period?
Credited to investment a/c.
Treated as capital receipt.
It means deduction from cost of investment.
What is the accounting treatment for right shares?
If subscribed.
Cost should be added to carrying amount of original holding.
9. Investment Accounts 2
If not subscribed but sold.
Sale proceeds to be taken to statement of profit and loss.
What is the treatment for bonus issue?
No amount is to be entered in capital column as investor has not paid anything.
Disposal of Investments
What is the treatment for disposal of investments?
Difference between carrying amount and disposal proceeds, net of expenses is recognized in P&L statement.
What is the treatment if part of investments are disposed?
Carrying amount is allocated to that part on the basis of average carrying amount.
What is the treatment if investments are held as stock in trade?
Cost is to be disposed as per AS 2.
Reclassification of Investments
What is the treatment if investments are classified from current to long term investments?
Valued at lower of cost or fair value.
What is the treatment if investments are classified from long term to current investments?
Valued at lower of cost or carrying amount.
Solving Procedure
How is investment a/c prepared?
Prepare format of investment a/c.
Date Particulars Face value Interest Cost Date Particulars Face
To balance c/d F.V. Interest accrued Ex-interest price By bank a/c -
Pre acquisition
To bank a/c F.V. Ex- interest price By bank a/c F.V.
interest
Profit on sale of
To P&L a/c - - By P&L a/c -
investment
By balance c/d F.V.
Total Total Total Total
Create timeline.
Purchase of investments.
Interest/dividend on investments.
Sale of investments.
Closing balance.
Prepare working notes.
Purchase price.
Cum interest purchase price.
9. Investment Accounts 3
(–) Interest accrued.
(+) Brokerage.
(+) Stamp duty and expenses.
(=) Ex-interest price.
Profit/loss on sale of investments.
Ex-interest selling price.
(–) Brokerage.
(–) Ex-interest cost.
F.V. of investment × cost incurred till date ÷ F.V. till date.
(=) Profit or loss.
Interest.
F.V. of investment × % of interest × no. of months ÷ 12 months.
Closing balance.
Cost or
Balancing figure.
Market value, whichever is lower.
9. Investment Accounts 4