1. ACCOUNTING FOR
INVESTMENTS.

2. DEFINITIONS:
INVESTMENTS: assets held by an enterprise for earning income by way of dividends, interests, and rentals, for capital appreciation, or for other benefits to the investing enterprise. (Assets held in stock-in-trade are not investments)
CURRENT INVESTMENTS: investment that is by its nature readily realizable and is intended to be held for not more than one year from the date on which such investment is made.
LONG-TERM INVESTMENTS: investment other than a current investment.

3. Contd.
INVESTMENT PROPERTY: investment in land or buildings that are not intended to be occupied substantially for use by or in the operations of the investment enterprise.
FAIR VALUE: 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 evidences of fair value.
MARKET VALUE: amount obtainable from the sale of an investment in an open market, net of expenses necessary to be incurred on or before disposal.

4. CLASSIFICATION OF INVESTMENTS
An enterprise should disclose current investments and long-term investments distinctly in its financial statements.
Further classification of current and long term investments should be as specified in the statute governing the enterprise. In the absence of a statutory requirement, such further classification should disclose, where applicable, investments in:
Government or trust securities;
Shares, debentures or bonds;
Investment properties;
Others- specifying nature.

5. COST OF INVESTMENTS
The cost of investment should include acquisition charges such as brokerage, fees and duties.
If an investment is acquired, or partly acquired, by the issue of shares or other securities, the acquisition cost should be 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 for another asset, the acquisition cost of the investment should be determined by reference to the fair value of the asset given up. Alternatively, the acquisition cost of the investment may be determined with reference to the fair value of the investment acquired if it is more clearly evident.

6. INVESTMENT PROPERTIES
The cost of any shares in a co-operative society or a company, the holding of which is directly related to the right to hold the investment property, is added to the carrying amount of the investment property.

7. DISPOSAL OF INVESTMENTS
On disposal of an investment, the difference between the carrying amount and the disposal proceeds, net of expenses, is recognised in the profit and loss statement.
When disposing of a part of the holding of an individual investment, the carrying amount to be allocated to that part is to be determined on the basis of the average carrying amount of the total holding of the investment.

8. RECLASSIFICATION OF INVESTMENTS
Where long-term investments are reclassified as current investments, transfers are made at the lower of cost and carrying amount at the date of transfer.
Where investments are reclassified from current to long-term, transfers are made at the lower of cost and fair value at the date of transfer.

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

10. INVESTMENTS WITHOUT FIXED INTEREST
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

11. 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).

12. 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

13. 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

14. 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 or
= (Selling price-Selling expense) – Cost of investment sold

15. COST OF INVESTMENT Weighted average method First-in-first-out 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.

16. 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.

17. 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

18. 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

19. 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
Add Brokerage / commission
Dealing Price
Add interest given up to seller (Nominal value*interest rate*no. of months from
acquisition to the coming payment date/12)

20. 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

21. 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
Less Brokerage fee/ Commission
Less Accrued income given up by seller
(Nominal value*Interest rate*No. of months from last
payment date to date/12)

22. 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

23. 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
Less brokerage fee / commission
Dealing Price
Add Dividend given up by buyer
(Nominal value*Interest rate*No. of month from acquisition
To the coming payment date)

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