1. Chapter 6 Investment Accounts

2. Learning objectives
record the purchases and sales of investments in shares, debentures and government stock
without dividend complications;
at ex. dividend;
at cum. dividend;
account for dividends and interest received on investments;
account for a bonus issue; and
account for a right issue.

3. Concept Chart Investments Investments with fixed interest/returns
Ordinary shares
Debentures
Preference shares
Government bonds
Investment without fixed
interest/returns

4. 1.1: Investments without Fixed Interest
These are mainly ordinary shares.
A. ACCOUNTING PROCEDURES
Transactions
Accounting entries
Cost of investment purchased (cost + other acquisition cost, e.g. brokerage fees, commission and stamp duty)
Dr Investments (Capital+nominal)
Cr Bank
2. Receipt of dividend
Dr Bank
Cr Investment Income
3. Sale of investment (proceeds – other selling expenses e.g brokerage fees, commission and stamp duty)
Cr Investments (capital+nominal)
4. Profit on sale on investment (reverse the entries for a loss on the sale of the investment)
Dr Investments
(Capital)
Cr Profit and Loss
5. Transfer of income to the profit and loss account at the end of the accounting year
Dr Investment Income

5. On the purchase of an investment, the total cost ( commission, brokerage and expenses) are recorded in the investment account.

6. Example 1
On 1 January 1996, Fortune Ltd. Purchased 1,000 $1 ordinary shares in Lucky Ltd. At 96. The brokerage fee incurred was $100.
On 30 June 1996, Fortune Ltd. Received a dividend of $0.1 per share.
On 31 December 1996, Fortune Ltd. Sold 500 shares at A $30 brokerage fee was paid.

7. Investment – Ordinary Shares in Lucky Ltd.
Date
Particulars N I C
Date
Particulars N I C
1996 $ $ $
1996 $ $ $
1/1 Bank –purchase
(1000*096)
30/6 Bank – dividend
(1,000 x 0.1)
31/12 P&L – gain
570-(1060*500/1000)
31/12 Bank – sale
(500*1.2-30)
31/12 Bal. c/f
31/12 P&L-dividend 1,

8. Profit & Loss Account for the year ended 31 December 1996 (Extract)$
Gross Profit X
Add:Gain on Disposal of Investment
Investment Income
Balance Sheet as at 31 December 1996 (Extract) $
Fixed Assets
Investment

9. B. Accounting for a Bonus Issue and a Rights Issue
bonus issue is an issue of ordinary shares out of a company’s reserve to its shareholders instead of a cash dividend.
No double entry would be made in the books of the shareholders,
The value of the issue should be entered on the debit side of the nominal column of the investment account (on a memorandum basis only).

10. Rights issue
Right issue is an issue of the rights to the existing shareholders to subscribe ordinary shares at a price lower than market value. There are 3 ways the shareholders holding the rights can respond.
Renounce the rights
No entry
Selling the rights
Dr Bank
Cr Investment Account (capital column)
With the sale
proceeds

11. Take up the rights
Buy extra rights from other shareholders and take up the rights
Dr Investment Account
(Capital column)
Cr Bank
With the price
paid for the shares
Dr Investment( Capital column)
Cr Bank
No entry should be made in the
nominal column
With the price
paid for the extra
rights
Dr Investment (Capital column)
paid for the shares

13. Example 2
A company received 1,000 bonus shares of a par value of $1 and a market value of $1.2, and rights to subscribe 1,000 shares. The company sold 1,000 rights for $0.2 each.

14. Investment Account (Extract)$ $ $ $ $ $
Bonus Issue
Bank

15. Example 3
The following transactions took place for the year ended 31 December 1996.
1996
Feb 1 The company purchased 150,000 ordinary shares in Benson Ltd. of $1 each for $300,000.
May 1 Benson Ltd. declared it would give members the rights to apply for one share for every five held on 1 April 1996 at a price of $1.5 per share fully payable on application.
June 1 The company purchased the rights for 200 shares from other shareholders of Benson Ltd. at $0.1 per share.
July 1 Applied and paid for all shares in Benson Ltd. on all rights held.

16. Investment – Ordinary Shares in Benson Ltd.C N I C
1996 $ $ $
1996 $ $ $
1/2 Bank – purchases
31/12 Bal. c/f
1/6 Bank(200*$0.1)
1/7 Bank – rights issue
(W1)
180,
180,
W1:
Nominal value of shares purchased=(150000/5+200)*$1=$30200
Cost of investment=30200*$1.5=$45300

17. C. Profit or Loss on the Disposal of Investments
Profit or loss on disposal of investments is calculated by this equation:
Profit on disposal = Sale proceeds-cost of investment sold
= (Selling price-Selling expense) – Cost of investment sold

18. Dec income
Nov cost
30/11/2000 bought 31/12/2000 received interest at once
Part of the cost represents income

19. D. Cost of investment Weighted average method
There are 2 methods for calculating the cost of the investments:
Weighted average method
Using this method, the cost of the investment sold is determined by the average of investment held.
First-in-first-out method
Using this method, the cost of the investment sold is determined by the unit price of the investment that is purchased earliest.

20. Example 4
Fortune Ltd. had the following transactions in ordinary shares of Joyce Ltd., during the year ended 31 December 1996.

21. Jan 1. Purchased 10,000 ordinary shares of $1 each in Joyce Ltd. at a
Jan 1 Purchased 10,000 ordinary shares of $1 each in Joyce Ltd. at a cost of $10,500. Feb 1 Purchased 20,000 ordinary shares of $1 each in Joyce Ltd. at $1.5 per share. Mar 1 Sold 4,000 ordinary shares in Joyce Ltd. at $2 per share. Selling expenses were $50. Mar 31 Joyce Ltd. made a one for 10 bonus issue. Mar 31 Received interim dividend of 20 cents per share from Joyce Ltd. The new shares did not rank for the dividend. May 31 Sold 8,000 ordinary shares in Joyce Ltd. For $20,000. Nov 1 Joyce Ltd. gave shareholders the rights to apply for one share of every five shares held on 31 August at a price of $1.2 per share fully payable on application. Nov 20 Purchased the rights for 500 shares from other shareholders of Joyce Ltd. at $0.5 per share. Nov 25 Applied and paid for all shares in Joyce Ltd. On all rights held. Nov 30 Sold 6,000 ordinary shares in Joyce Ltd. at $2.5 per share. Selling expenses were $50.

22. Investment – Ordinary Shares in Joyce Ltd.
Weighted average method
Investment – Ordinary Shares in Joyce Ltd.
Date
Particulars N I C
Date
Particulars N I C
1996 $ $ $
1996 $ $ $
1/1 Bank – purchases
1/3 Bank – sales ($8,000
- $50)
½ Bank – purchases
31/3 Bonus issue
($10,000 + $20,000 –
$4,000)/
31/3 Bank – dividend
(10, ,000 –
4,000) x
20/11 Bank – purchases of
rights
31/5 Bank – sales
30/11 Bank – sales
($15,000 - $50)
25/11 Bank – purchases (W1)
31/12 P&L – dividend
received
31/12 Bal. c/f
31/12 P&L – gain
on disposal (W2)
37,
37,
W1 No. of rights taken up:( )/5+500=4650
Cost of investment =4620*$1.2=$5544

23. W2 Profit or loss on disposal
1st disposal: $
Sales proceeds
Less cost of investments( )*4000/
Profit on disposal
2nd disposal:
Sales proceeds
Less cost of investments(
5400)*8000/
Profit on disposal
3rd disposal:
Sales proceeds
Less cost of investments(
-9818)*6000/
Profit on disposal
Total profit on disposal= =20289

24. Investment – Ordinary Shares in Joyce Ltd.
First-in-first-out method
Investment – Ordinary Shares in Joyce Ltd.
Date
Particulars N I C
Date
Particulars N I C
1996 $ $ $
1996 $ $ $
1/1 Bank – purchases
1/3
Bank – sales ($8,000 - $50)
4,000
7,950
½ Bank – purchases
31/3 Bonus Issue
($10,000 + $20,000 –
$4,000)/10
31/3
Bank – dividend
(10, ,000 – 4,000) x 0.2
5,200
20/11
Bank – purchases of right
31/5
Bank - sales
8,000
20,000
250
30/11
Bank – sales ($15,000 - $50)
25/11
Bank – purchases
4,620
5,544
6,000
14,950
31/12 P&L – dividend received
31/12 Bal. c/f
31/12 P&L – gain of
disposal (W3)
37,
37,

25. W3 Profit or loss on disposal
1st disposal: $
Sales proceeds
Less cost of investments(10500*4000/
Profit on disposal
2nd disposal:
Sales proceeds
Less cost of investments10500*6000/ *2000/ Profit on disposal
3rd disposal:
Sales proceeds
Less cost of investments30000*6000/
Profit on disposal
Total profit on disposal= =20400

26. 1.2: Investments with Fixed Interest
They can be preference shares, debentures and government stocks.
Investment income is distributed once or twice a year at given dates.
A company is only entitled to income from an investment for the exact period that the investment is held.
If the acquisition occurs between 2 payments dates, either the seller or the buyer will have the rights to receive interest. However some interest belongs to the seller and some belongs to the buyer; adjustments are to be made for the accrued income.

27. The price of the investment does not include the right to the next instalment of interest…..ex div….excluding dividend.
Where it does include the right to receive the next instalment of interest…..cum div…….including dividend.
All prices are cum div. Unless stated the otherwise.

28. A. Purchase at Cum. Div / Cum. Int.
The buyer of investments has the rights to receive the entire income payable on the first payment date after acquisition.
The extra income for the period from last payment to acquisition reduces the cost of the investments.
Cost of investment $
Purchase price x
Add Brokerage fee / Commission x x
Less Accrued income given up by seller
(Nominal value*Interest rate*No. of months from the last x payment date to acquisition) / x

29. Accounting entries: Dr Investment (N+C) Dr Investment Income (I)
Cr Bank
With the cost of the investment
With the excess income receivable
With the total amount paid

30. Example 5
On 31 April 1994, Gordon Ltd. purchased $10,000 of 12% preference shares in Joyce Ltd. cum. div. at 90. A $200 brokerage fee was paid. Interest was paid on 31 December and 30 June every year.

31. Investment – Ordinary Shares in Joyce Ltd.
Date
Particulars N I C
Date
Particulars N I C
1994 $ $ $
1994 $ $ $
31/4 Bank – purchases
(10000* )
30/6 Bank – dividend
(10000*12%*1/2)
31/12 Bank – dividend
31/12 P&L – dividend
31/12 Bal. c/f
10,
10,
Dividend given up by seller (from the last payment date to acquisition)
= $10,000 x 12% x 4/12 = $400

32. B. Purchase at Ex. Div. / Ex. Int.
The buyer of investments does not have the rights to receive any interest / dividend income payable on the first payment date after acquisition.
The income given up should be included in the cost of the investments.
Cost of investment $
Purchase price x
Add Brokerage / commission x
Dealing Price X
Add interest given up to seller (Nominal value*interest rate*no. of months from
acquisition to the coming payment date/12) X X

33. Accounting entries: Dr Investment (C+N) Cr Bank Dr Investment (C)
Cr Investment Income
Dealing price
Interest given up for the period from
acquisition to the coming payment date

34. Example 6
The facts are the same as Example 5, except that the investment was purchased at ex. div.

35. Investment – Ordinary Shares in Joyce Ltd.
Date
Particulars N I C
Date
Particulars N I C
1994 $ $ $
1994 $ $ $
30/4 Bank – purchases
(10000*09+200)
30/4 Investment – ex. Div
31/12 Bank – dividend
30/4 Investment Income
– ex. div
31/12 Bal. c/f
31/12 P&L –dividend
10,
10,
Dividend given up to seller (from acquisition to the coming payment date)
= $10,000 x 12% x 2/12 = $200

36. C. Sell at Cum. Div. / Cum. Int.
The seller of investments gives up the rights to receive the income on the first payment date after sale.
The income given up reduces the net sale proceeds. The net sale proceeds should be calculated in the following way.
Net sale proceeds: $
Selling price x
Less Brokerage fee/ Commission x x
Less Accrued income given up by seller
(Nominal value*Interest rate*No. of months from last x
payment date to date/12) x

37. Accounting entries Dr Bank Cr Investment Income (I)
Cr Investment (C+N)
With the total sale proceeds
With accrued income given up With the net sale proceeds

38. Example 7
The facts are the same as in Example 5. On 1 Feb 1995, Gordon Ltd. sold $5,000 12% preference shares in Joyce Ltd. cum. div. At 95. A $250 commission was paid.

39. Investment – Ordinary Shares in Joyce Ltd.
Date
Particulars N I C
Date
Particulars N I C
1995 $ $ $
1995 $ $ $
1/1 Bal. b/f
½ Bank – sales
(5000* )
31/12 P&L – dividend
31/12 P&L – profit
on disposal
( *5000/10000)
30/6 Bank – dividend
31/12 Bank – dividend
31/12 Bal. c/f
10,
10,
Dividend given up by seller (from the last payment date to the date of sale)
= $5,000 x 12% x 1/12 = $50

40. D. Sell at Ex. Div./Ex. Int.
The seller will receive the income on the first payment date after sale.
The extra income increases the total sale proceeds.
Total Sales Proceeds $
Selling Price x
Less brokerage fee / commission x
Dealing Price X
Add Dividend given up by buyer X X
(Nominal value*Interest rate*No. of month from acquisition
To the coming payment date)

41. Accounting entries: Dr Bank Cr Investment Dr Investment Income
Dealing price
Excess income receivable for the period
from sale to the coming payment date

42. Example 8
The facts are the same as in Example 7. On 1 April 1996, Gordon Ltd. sold $5,000 12% preference shares in Joyce Ltd. ex. div. At 90. A $200 commission was paid

43. Investment – Ordinary Shares in Joyce Ltd.
Date
Particulars N I C
Date
Particulars N I C
1996 $ $ $
1996 $ $ $
1/1 Bal. b/f
¼ Bank – sales
($5000* )
1/4 Investment – ex. div
¼ Investment Income
– ex. div
31/12 P&L – dividend
31/12 P&L – profit on
disposal ( *5000/10000)
30/6 Bank – dividend 5, 5,
Dividend given up by buyer (from sale to the coming payment date) = $5,000 x 12% x 3/12 = $150