Ch.

1: Investment
Accounts

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.
2

Concept Chart
Investments

Investments with
fixed interest/returns

Investment without fixed

interest/returns

Debentures
Preference shares
Government bonds

Ordinary shares
3

1.1: Investments without Fixed

Interest
These are mainly ordinary shares.
A. ACCOUNTING PROCEDURES

Transactions
1.

Cost of investment
purchased (cost + other
acquisition cost, e.g.
brokerage fees,
commission and stamp
duty)

Accounting
entries
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)

Dr Bank
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

Dr Investment Income

On the purchase of an investment, the total cost ( commission,

brokerage and expenses) are recorded in the investment
account.

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 120. A $30
brokerage fee was paid.
6

Investment Ordinary Shares in Lucky Ltd.

Date
1996

Particulars

N
$

I
$

C
$

1/1 Bank purchase

(1000*096)+100
31/12 P&L gain

Date
1996

Particulars

N
$

I
$

C
$

30/6 Bank dividend

1000

1060

570-(1060*500/1000)
31/12 P&L-dividend

40
100

1,000

100 1100

(1,000 x 0.1)
31/12 Bank sale
(500*1.2-30)
31/12 Bal. c/f

100
500

570

500

530

1000 100 1100

Profit & Loss Account for the year ended 31 December 1996
(Extract)

Gross Profit

$
X

Add:Gain on Disposal of Investment

40

Investment Income

100

Balance Sheet as at 31 December 1996 (Extract)

$
Fixed Assets
Investment

530

B. Accounting for a Bonus Issue

and a Rights Issue
1. Bonus issue

bonus issue is an issue of ordinary shares

out of a companys 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).
9

2. 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.
1.

2.

Renounce the rights

No entry
Selling the rights

Dr Bank
Cr Investment Account (capital
column)

With the sale

proceeds
10

3.

Take up the rights

Dr Investment Account
With the price
paid for the shares
(Capital column)
Cr Bank
4. Buy extra rights from other
shareholders and take up the rights
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

With the price

paid for the shares

column)

11

12

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.

13

Investment Account (Extract)

N
$
Bonus Issue
-

1000

I
$

C
$
-

N
$
Bank
200

I
$

C
$

14

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.
15

Investment Ordinary Shares in Benson

Ltd.
N
$

1996
1/2

Bank purchases 150000

I
$

C
$
300000

N
$

1996
31/12 Bal. c/f

180200

I
$

C
$
345320

1/6 Bank(200*$0.1)
20
1/7 Bank rights issue
(W1)
45300

30200
180,200

345320

180,200

345320

W1:
Nominal value of shares purchased=(150000/5+200)*$1=$30200
Cost of investment=30200*$1.5=$45300
16

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 proceedscost
of investment sold
= (Selling price-Selling
expense) Cost of
investment sold

17

Nov cost

30/11/2000 bought

Dec income

31/12/2000 received interest at once

Part of the cost represents income

18

D. Cost of investment
There are 2 methods for calculating the cost of the
investments:

1. Weighted average method

Using this method, the cost of the

investment sold is determined by the
average of investment held.
2. 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.
19

Example 4
Fortune Ltd. had the following

transactions in ordinary shares of

Joyce Ltd., during the year ended
31 December 1996.

20

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.
21

Weighted average method

Investment Ordinary Shares in Joyce Ltd.
Date

Particulars

N
$

1996
1/1 Bank purchases

Bank purchases
31/3 Bonus issue

I
$

C
$

10000

10500

20000

30000

1996

N
$

I
$

C
$

1/3 Bank sales ($8,000

- $50)

4000

7950

(10,000 + 20,000

$4,000)/10
2600
20/11 Bank purchases of
rights
25/11 Bank purchases (W1)

250

4620

5544

31/12 P&L dividend

on disposal (W2)

Particulars

31/3 Bank dividend

($10,000 + $20,000

received
31/12 P&L gain

Date

4,000) x 0.2
31/5 Bank sales

5200
8000

20000

6000
19220

14950
23683

37,220 5200

66853

30/11 Bank sales

($15,000 - $50)
31/12 Bal. c/f

5200
20859
37,220 5200 66853

W1 No. of rights taken up:(10000+20000+2600-4000-8000)/5+500=4650

Cost of investment =4620*$1.2=$5544
22

W2 Profit or loss on disposal

1st disposal:
Sales proceeds
Less cost of investments(10500+30000)*4000/10000+20000
Profit on disposal
2nd disposal:
Sales proceeds
Less cost of investments(10500+300005400)*8000/10000+20000+2600-4000
Profit on disposal
3rd disposal:
Sales proceeds
Less cost of investments(10500+30000+250+5544-5400
-9818)*6000/10000+20000+2600+4620
Profit on disposal

$
7950
5400
2550
20000
9818
10182
7950
7393
7557

Total profit on disposal= 2550+10182+7557=20289

23

First-in-first-out method
Investment Ordinary Shares in Joyce Ltd.
Date

Particulars

1996
1/1

N
$

I
$

C
$

Bank purchases

10000

10500

Bank purchases
31/3 Bonus Issue

20000

30000

Date
1996
1/3
31/3

($10,000 + $20,000

Bank sales
($8,000 - $50)

N
$

250

Bank purchases 4,620

31/12 P&L dividend received

5,544
5200

I
$

C
$

4,000

7,950

Bank dividend
(10,000 + 20,000
4,000) x 0.2

$4,000)/10
20/11 Bank purchases
of right
25/11

Particulars

5,200

31/5

Bank - sales

8,000

20,000

30/11

Bank sales
($15,000 - $50)

6,000

14,950

31/12 Bal. c/f

19220

23794

31/12 P&L gain of

disposal (W3)

20400
37,220 5200

66694

37,220

5200 66694

24

W3 Profit or loss on disposal

1st disposal:
Sales proceeds
Less cost of investments(10500*4000/10000
Profit on disposal
2nd disposal:
Sales proceeds
Less cost of investments10500*6000/10000+30000*2000/20000
Profit on disposal
10700
3rd disposal:
Sales proceeds
Less cost of investments30000*6000/20000
Profit on disposal

$
7950
4200
3750
20000
9300

14950
9000
5950

Total profit on disposal=3750+10700+5950=20400

25

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.
26

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.

27

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
Add Brokerage fee / Commission
Less Accrued income given up by seller
(Nominal value*Interest rate*No. of months from the last
payment date to acquisition) / 12

$
x
x
x
x
x
28

Accounting entries:

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

29

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.

30

Investment Ordinary Shares in Joyce Ltd.

Date
1994

Particulars

31/4 Bank purchases

N
$

I
$

10000 400

C
$
8800

(10000*0.9+200-400)
31/12 P&L dividend

800

Date
1994

Particulars

I
$

C
$

30/6 Bank dividend

600

(10000*12%*1/2)
31/12 Bank dividend

600

31/12 Bal. c/f

10,000 1200 8800

N
$

10000

8800

10,000 1200 8800

Dividend given up by seller (from the last

payment date to acquisition)
= $10,000 x 12% x 4/12 = $400

31

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
Dealing Price
Add interest given up to seller

$
x

(Nominal value*interest rate*no. of months from

acquisition to the coming payment date/12)

X
X
32

Accounting entries:

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

33

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

34

Investment Ordinary Shares in Joyce Ltd.

Date Particulars
1994
30/4 Bank purchases

N
$
10000

I
$

(10000*09+200)
30/4 Investment Income

31/12 Bal. c/f

ex. div.
31/12 P&L dividend

C
Date Particulars
N
$
$
1994
9200 30/4 Investment ex. Div
31/12 Bank dividend

I
$

C
$

200.
600

10000

9400

200
800
10,000 800

9400

10,000 800 9400

Dividend given up to seller (from acquisition to

the coming payment date)
= $10,000 x 12% x 2/12 = $200
35

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
36

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

37

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.

38

Investment Ordinary Shares in Joyce Ltd.

Date
1995

Particulars

1/1 Bal. b/f

31/12 P&L dividend

N
$

I
$

10000

C
$
8800

650

Particulars

Bank sales

N
$
5000

I
$

C
$

50

4450

(5000*095-250-50)

31/12 P&L profit

30/6 Bank dividend

on disposal
50
(4450-8800*5000/10000)
10,000 650

Date
1995

8850

31/12 Bank dividend

31/12 Bal. c/f
4400

300
300
5000
10,000

650 8850

Dividend given up by seller (from the last

payment date to the date of sale)
= $5,000 x 12% x 1/12 = $50
39

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
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)
40

Accounting entries:

Dr Bank
Dealing price
Cr Investment
Dr Investment Income Excess income receivable for the period
Cr Investment
from sale to the coming payment date

41

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

42

Investment Ordinary Shares in Joyce Ltd.

Date
1996

Particulars

N
$

I
$

C
$

Date
1996

Particulars

1/1 Bal. b/f

5000
4400
1/4 Investment ex. div.

150

($5000*0.9-200)

31/12 P&L dividend

150

Investment Income

Bank sales

(44508800*5000/10000)
5,000 300

I
$

C
$

5000

4300

ex. div.

31/12 P&L profit on

disposal

N
$

50
4450

150

30/6 Bank dividend

300
5,000

300

Dividend given up by buyer (from sale to the

coming payment date)
= $5,000 x 12% x 3/12 = $150
43

4450

Investment

9% Debenture

interest payable 1 April and 1 October

May 31 purchased 40,000 at 96 cum. int

44

45