ACCOUNTANCY FORM 5-INVESTMENT ACCOUNT

ACCOUNTANCY FORM 5-INVESTMENT ACCOUNT

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ACCOUNTANCY FORM 5-INVESTMENT ACCOUNT

UNAWEZA JIPATIA NOTES ZETU KWA KUCHANGIA KIASI KIDOGO KABISA:PIGA SIMU/WHATSAPP: 0787237719




ACCOUNTANCY FORM 5-INVESTMENT ACCOUNT

INVESTMENT ACCOUNT

  • It can be divided into two main classes
  • To spend money for the purpose of generating income

1. Government stocks e.g.: treasury bills, bonds etc

2. Investment in limited companies e.g. shares, stock / debenture

Terms used in investment account

1. Sales and purchases of investment \investment can be either bought or sold without interest (Cum-div)

2. Interest (Cum-div)

3. Without interest (ex – div)

NOTE:

1. General (Cum-div) means that the purchase price includes interest accrued / interest outstanding to date of purchase. For this case it should be excluded from the capital value.

2. Generally (ex – div) means that the purchase price includes interest accrued /interest outstanding to date of purchase for this case it should be excluded from the capital value.

INVESTMENT ACCOUNT

Accounting treatments /records.

Records: Particulars of money invested in different type of securities e.g Government stock, shares, debentures etc.

Per value (Nominal value)

1. Purchase price – capital value

2. Interest received / Accrued

3. Different between cum-div and Ex – div

1. The purchase price include the interest accrued up to date of purchase where as this is not included in the case of ex – interest.
2. Nothing is payable for interest accrued where as it is payable in case of ex – interest.
3. Purchase drive is more than the real price of the security but the purchase price is the real price in case of ex –interest.




Date Details F Nominal Income Cost/capital date Details F Nominal Income Cost/capital
 

 

 

 

 

 

 

 

 

PROCEDURES IN RESPECT OF FIXED INTEREST SECURITIES

Purchase “Cum-div”

  • Stamp duty
  • Brokerage
  • Transfer fees etc.

1. Calculate the dividend accrued from the date it was last paid to the date of purchase this amount represent the income content in the purchase consideration.

2. We debit income columns with figure calculated in “b” above and the balance of purchase price to the cost column

3.We have to credit income column with income when received.

INVESTMENT ACCOUNT

Purchase (“ex – Div”)

  1. Debit cost column with total purchase price inclusive of all expenses.
  2. Calculate the dividend from the date of purchase to the data of payment. This amount represent the income deluded from the
  3. By means of journal entries debit cost column with figures At in (ii) and credit income column with the same amount.

Sales (“Cum-div”)

  1. Work out the net proceeds of sales after deducting /reducing or brokerage
  2. calculate the div. This amount represents the income deducted from the sales.
  • On receipt of interest credit this cost Column.




Sales (“Ex – div”)

  1. The amount of dividend or interest by which the sell price  reduced is debited.
  2. The whole of the profit proceed are credited to the net column.

calculation on profit or loss on sale of investment

Profit /loss on sale of investment

Profit /loss               D:\PERUZI NASI NOTES\UPAMIG~1\thlb\cr\tz\__i__images__i__\formula12.jpg

Note: Profit is when amount received from sale of investment is greater than the cost of investment sold

while loss is when amount from sale of investment is less that the cost of investment sold.

ILLUSTRATION

On 31st March 2006, ABC Ltd purchased 160,000/= 4% government stock  at 92 cum-div brokerage charges
amounted to 6400 interest is half yearly on 30th June and 31st December. On 1st June 2008, 90,000/=
of the stock was sold at 94 ex – div Brokerage chargers to 3800 show investment for the year 2006 and 2008

  DR                                               4% Government stock Account                                               CR

DATE DETAILS NOMINAL INCOME COST DATE DETAILS NOMINAL INCOME COST

 
2006         2006        
31.3 Purchase 160,000 1,600 152,000 30.6 Interest(Bank) 3,200
Profit & Loss 4,800 31.12 Interest(Bank) 3,200
31.12 Balance c/d 160,000 – 152,000
160,000 6,400 152,000     160,000 6,400 152,000
2007 152,000 2007
01.01 Balance b/d 160,000 30.06 Interest(Bank) 3,200
P&L 6,400 31.12 Interest(Bank) 3,200
31.12 Balance c/d 160,000 – 152,000
160,000 6,400 152,000     160,000 6,400 152,000
2008 2008
01.01 Balance b/d 160,000 152,000 01.06 Sales 90,000 – 80,800
01.06 P&L(Adjustment)    300 01.06 Adjustment      300
31.12 P&L 4,300 30.6 Interest(Bank) 3,200
31.12 Interest(Bank) 1 ,400
31.12 Balance c/d 70,000 – 70,900
160,000 4,600 152,000     160,000 4,600 152,000
2009
01.01 Balance b/d 70,000 70,900




WORKINGS

  1. 160,000 x 92%            = 147,200

Add: Brokerage =     6,400

153,600

Less: Interest

4/100   x 160,000 x 3/2= 1,600

Cost                                              =152,000

  1. Calculation of interest receivable

160’000 x 4/100 x 6/12   = 3,200

INVESTMENT ACCOUNT

  1. Sales of interest

90’000 x 94%                =   84,600

Add: Interest

4/100 x 90’000 x 1/12       =     300

84,900

Less: Brokerage                                3,800

Actual sales                          81,100

                                        PROFIT /LOSS ON SALE OF INVESTMENT

Sales proceeds     90’000 x 94% 84,600
Add:   Interest      300  84,900
Less: Brokerage    3,000
Actual sales  81,100
Less cost of sold (90,000/160,000 ×152,000)  85,500
Loss on sale of   investment  44,000

 

On 31st March 2006, I am limited purchase 800’00/= 4% government stock cum-div at 92 and brokerage was 32,000/= interest is paid on 30tha June and 31st December. On 1st June 450,000/= of the stock was sold at 94 ex-div brokerage amounting to 19,000/=. The Company repairs final account annually to 30th September show 4% government stock a/c in the company’s books making suitable approximate between capital and revenue ignore income tax.

Show profit I loss on sale of investment.

Notes

  1. Interest cum-div i.e. buyer shall not pay any amount way of interest since it is cum-div

Ex – div i.e. the buyer is to pay interest.




BROKERAGE

-Any amount paid by way of brokerage for purchase security shall be taken as a part of a cost of securities.

-Any brokerage paid on sales of securities should be deduced from the sale price of the securities.

-Profit & loss on sale of securities, in case any securities are sold during the year, any profit or loss on sale of such securities is usually transferred to the P & L A/C.

-Valuation /valued securities, at the end of accounting year the securities are usually valued on the basis of “Cost” “or” whichever is lower or whichever is less or market price.

-Any loss account of such valuation should be transferred.

-When the ordinary shares purchase, the full cost investment including expenses is debited to the cost column.

-There is no apportion ate of dividend on the purchase or sale of ordinary shares.

– The holders of ordinary shares are mostly entitled to receive some bonus share and right issues.

INVESTMENT ACCOUNT

BONUS ISSUE

  • When successful companies issue bonus to capitalize their reserve, the shareholders are not required to pay any amount for such shares.
  • The number of shares should be entered in the number of face value (nominal column) and nothing could be added in the amount of principle or cost column.

RIGHT ISSUE

  • If shares are first offered to the existing share holders as a matter of their rights, such shares are called RIGHT ISSUE such shares may be purchase by the share holders.

ILLUSTRATION I

A.B.C Ltd Bought 10,000 ordinary shares of each 1 shillings in Sahara Ltd on first April, 2008 at a cost 12,000/= on 1st August, 2008, Sahara Ltd made a bonus issue of 1 share for every 5 share held.

On 7th October, 2008 a (Dividend which applied to the bonus share) at 6% was received for the year ended 31st August 2008.

A.B.C Ltd Sold 300 of shares on 30th October for 3450 show Ordinary share a/c recording the above in the books of ABC Ltd.




Workings:

1: 5

X: 10,000

Bonus  = 2000

Dividend:

12,000 * 6% = 720

IN THE BOOKS OF ABC

DR                                                                   ORDINARY SHARE A/C                                                                                      CR

Date Details Nominal Income Cost Date Details Nominal Income Cost
1.4.08 purchase (bank) 10,000 12,000 dividend(bank) 720
1.8.08 bonus issue 2,000 sales(bank) 3,000 3,450
P&L 720 balance   c/d 9,000 8,550
12,000 720 12,000 12,000 720 12,000
balance   c/d 9000   8,550

 

INVESTMENT ACCOUNT

ILLUSTRATION II

Wewe limited purchased 20000 Ordinary shares of 11= each in mimi limited on 1st January, 2009 at the cost of 30,000/= on 1st July, mimi Limited announced a right issue of 2 Ordinary shares for every 5 held on that date at 1.75/= per share. Wewe limited took up 60% of the entitlement and sold the remaining 40% at 0.8 per share. Wewe limited received a divided of 25% record these transaction in the books of wewe limited for the year ended 31st December 2009.

Workings

  • Taken up: x   8,000   = 8,000 shares x 1.75 = 14,000
  • Right sold: [[8,000*40%]*0.8]->2560
  • Ordinary share   = 20,000

Right issue         =   4,800

Dividend 25% x   28,000     =   7,000




 DR                    ORDINARY SHARE INVESTMENT ACCOUNT                 CR

Date Details Nominal Income Cost Date Details Nominal Income Cost
1.1.2009 purchases 20,000 30,000 01.07.2009 right issue
1.7.2009 right taken up 8,000 14,000 sale bank 2560
31.12.2009 P&L 7,000 31.12.2009 Dividend rec 7,000
31.12.2009 Balance c/d 28,000 – 4,1440
28,000 7000 44,000 28,000 7,000 44,000
1.1.2010 balance   b/d 28,000 41,400

 

NOTES:

  • Right taken entered in nominal column the number of shares taken up and in cost column the cost of these shares.
  • Right sold /Right issue sold credit proceeds of sale in cost column.
  • These sale does not reserves in profit or but reduces the average cost of share holder.

EXERCISE

1. Cd ltd bought 2000 ordinary of 1/= each in 5 ltd on 1st April 2008 at cost of 24000/= on 1st August, 2008, 5 ltd made a bonus issue on 1 share for every 5 shares held. On 7th October 2008, a (Dividend) which applied to the braes Shan of 6% was received for year ended.

CD Ltd sold 6000 of the shares on 31st October, 2008 setta the made such apportion ate as practice.

2. X Ltd bought 10,000 Ordinary Share of 1/= each in B Ltd on 1st 1.2009 at a cost of 15,000/= On 1st July, B Ltd announced the right issue of 2 Ordinary shares for every 5 held on that date at 1.25 per share X Ltd look up 50% of the entitlement and sold the remaining 50% at 0.6 per share.

X Ltd received a dividend of 20% on Ordinary share in B Ltd on 31.12.2009

INVESTMENT ACCOUNT




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