J. K. SHAH CLASSES INTER C.A.- ACCOUNTING CHAPTER-7 (I) Investment in fixed interest securities Accounting Procedure 1. When the given transaction is at ex - interest price, the price itself is cost and additionally, the interest should be recorded in interest column. 2. When the transaction is given at cum-interest price, the given price should be bifercated into cost and interest for accounting purpose. 3. Record the entry for receiving half yearly interest on all the securities in hand on each interest date (hidden adjustment). 4. When the investments are sold, the profit or loss on sale should be calculated immediately (taking weighted average) and should be transferred to profit and loss a/c. 5. If no specification is given, the price should be concluded as Ex-Interest Price. 6. At the time of recording closing balance accrued interest on closing balance should be credited to interest column and at the time of recording opening balance, accrued should be debited to interest column (hidden adjustment). Treatment of Convertible Debentures : When a company converts its debenture into shares, for a debenture holder, it is a sort of barter exchange where he surrenders debentures and receives equity shares in return. Entry : Investment in equity shares of Ltd. A/c Dr. To Investment in Debentures of Ltd. A/c Note :1. The cost of debentures surrendered will be considered as cost of equity shares acquired and there will be no profit or loss on conversion. The profit or loss will arise in future when these equity shares will be sold. 2. At the time of surrender of debentures, the debentureholder will receive interest on debentures surrendered upto the date of surrender because now a fixed interest security is getting converted into variable interest security (hidden adjustment). : 66 : INVESTMENT ACCOUNTS
J. K. SHAH CLASSES INTER C.A.- ACCOUNTING (II) Investment Account of Equity Shares : W hen the equity shares are purchased the payment itself is considered as cost because this is a variable interest security and accrued dividend therein cannot be estimated. Important Adjustments : 1. Treatment of Bonus Shares : When bonus shares are received it is technically not a financial transaction because the cost involved is NIL but still in investment a/c, the entry should be passed in quantity column as bonus shares received will reduce average cost of investment. 2. Treatment of Right Issue : When the right shares are offered the shareholders has following two options : (a) (b) Subscribe for shares : this is like a normal purchase of investment Renounce the right : the consideration received on transfer of right in favour of some other person is considered as a sundry income to be credited to profit / loss account. 3. Treatment of Final Dividend : When the dividend is received, it is to be bifercated into two parts : (a) (b) pre-acquisition period dividend - it is to be considered as a capital receipt which should be credited to cost column so as to reduce the cost of investment post-acquisition period dividend - it is a routine revenue income to be credited in dividend column. 4. Treatment of Interim Dividend : To be treated as revenue income and should be credited to Dividend column 5. Sale of Investment : Calculate profit / loss on sale on weighted average cost basis. : 67 : INVESTMENT ACCOUNTS
J. K. SHAH CLASSES INTER C.A.- ACCOUNTING Q. 1. Mr. A has made investment in 12% Debentures of X Ltd. (Interest dates March 31 and September 30). From the following details prepare Investment account in the books of Mr. A for the year 2012. 1.1.2012 Purchased 300 Debentures @ 96 Ex - interest 1.3.2012 Purchased 200 Debentures @ 99 Cum - interest 1.8.2012 Sold 100 Debentures @ 98 Ex - interest 1.12.2012 Purchased 200 Debentures @ 97. Q. 2. Calcutta Investments hold 400, 12% Debentures of ` 100 each in Acme Ltd. as on 1st April, 2010 at a cost of`50,000. Interest is payable on 30th June and 31st December each year. On 1st June, 2010, 200 debentures are purchased cum interest at ` 21,400. On 1st November, 2010, 200 debentures are purchased ex-interest at ` 19,200. On 31st December, 2010, 300 debentures are sold cum-interest for ` 32,250. Prepare Investment account valuing closing stock as on 31st March, 2011 at cost or market price whichever is lower. The debentures were quoted at`98 on 31st March, 2011. Q. 3. A purchased on 1st March, 2011 ` 24,000 5% Bharat Debenture Stock at 90 cum-interest, being payable on 31st March and 30th September each year. Stamp and expenses on purchase amounted to`20 and brokerage at 2% was charged. Interest for the half year was received on the due date. On 1st September,` 10,000 of the stock was sold at 92 ex-interest less brokerage at 2%. On 30th September, ` 8,000 stock was purchased at 91 ex-interest plus brokerage at 2% and charges ` 10. On 1st December, ` 6,000 stock was sold at 94 cum interest less brokerage 2%. The market price of stock on 31st December was ` 92. Show the Investment Account for the year ended 31st December, making all calculation in months. Q. 4. Bharat Finance Ltd. purchased on 1st May, 2010 13.5% convertible debentures in Glance Ltd. of the face value of`1,00,000 @ 105. Interest on debentures is payable each year on 31st March and 30th September. The following were the other transactions with regard to these debentures carried by Bharat Finance Ltd. in 2010. Aug.1 Purchased ` 50,000 Debentures @ 107 cum-interest. Oct. 31 Sold ` 40,000 Debentures @ 103. Nov. 30 Receipt of 2,200 Equity Shares in Glance Ltd. of` 10 each in conversion of 20% of the Debentures held. Dec.15 Purchased 1000 Equity Shares in Glance Ltd. @ ` 16. The market value of the Debentures and Equity Shares in Glance Ltd. at the end of 2010 was respectively 96 and ` 15. The accounting year of the Bharat Ltd. is the Calendar year. Prepare the Debenture Investment Account in the books of Bharat Ltd. on Weighted Average Cost Basis. : 68 : INVESTMENT ACCOUNTS
J. K. SHAH CLASSES INTER C.A.- ACCOUNTING Q. 5. On 1.1.2010, sunder had 25,000 equity shares of "X" Ltd. a book value of ` 15 per share (Purchased on 1.10.2009). On 20.6.2010, he purchased another 5,000 shares of the company at`16 per share. The directors of "X" Ltd. announced a bonus and right issue. The terms of the issue are as follows : Bonus basis 1 : 6 (Date 16.8.2010) Rights basis 3 : 7 (Date 31.8.2010) Price ` 15 per share. Due date for payment 30.9.2010. Shareholders can transfer their rights in full or in part. Accordingly Sundar Sold 33-1/3% of his entitlement to Shekhar for a consideration of ` 2 per share. Dividends : Dividends for the year ended 31.3.2010 at the rate of 20% were declared by X Ltd. and received by Sundar on 31.10.2010. On 15.11.2010, Sunder sold 25,000 equity shares at a premium of ` 5 per share. You are required to prepare Investment Account. For your exercise, assume that the books are closed on 31.12.2010 and shares are valued at average cost. Q. 6. Mr. Brown has made following transactions during the financial year 2016-2017. 15.6.2016 :- Purchased 150000 equity shares of ` 10 each in Alpha Ltd. for ` 25 each through a broker, who charged brokerage @ 2%. 14.10.2016 :- Alpha Ltd. made a bonus issue of two shares for every three shares held. 31.10.2016 :- Sold 80,000 shares in Alpha Ltd. for `22 each. 1-1-17 :- Received 15% Interim dividend on equity shares of Alpha Ltd. Prepare Investment Account. : 69 : INVESTMENT ACCOUNTS
CHAPTER - 3 PART A : THEORY SECTION Creation of debenture redemption fund / sinking fund : The company have to provide for future redemption of debenture by creation of a debenture redemption fund or sinking fund. Under this approach a fixed amount is appropriated from the profits of every year towards redemption which is invested in some fixed interest securities. The interest received year after year is also kept aside for redemption purpose which is reinvested. In the last year, the accumulated investments are sold and the proceeds are utilised for redemption of debentures. Proforma Journal Entries : (I) In the first year : 1. For annual appropriation Profit and Loss Appropriation a/c Dr. To Sinking Fund a/c 2. For making investment Sinking Fund Investments a/c Dr. To Bank a/c (II) From the second year onwards : 1. For receipt of Interest Bank a/c Dr. To Sinking fund a/c. 2. For annual appropriation Profit and Loss appropriation a/c Dr. To Sinking fund a/c 3. For making investments Sinking Fund Investments a/c Dr. To Bank a/c (Annual appropriation + Interest) (III) In the last year : 1. For receipt of interest Bank a/c Dr. To Sinking fund a/c 2. For annual appropriation Profit and Loss Appropriation A/c Dr. To Sinking fund a/c : 37 :
3. For sale / disposal of investment Bank a/c Dr. To Sinking Fund Investment a/c Note : Profit or Loss on sale of investments will be transferred to sinking fund a/c. 4. For redemption (money payable to debenture holders) Debentures a/c Dr. Premium on Redemption a/c Dr. To Debenture holders a/c 5. For writing off Premium on Redemption Sinking Fund a/c Dr. 6. For Pay off To Premium on Redemption a/c Debenture holders a/c Dr. To Bank a/c 7. For Writing off Sinking Fund Sinking Fund a/c Dr. To General Reserve a/c Note : If all the debentures are redeemed, the entire balance in sinking fund a/c will be transferred to General Reserve. But if a part of the debenture is redeemed then an amount equivalent to face value of debentures redeemed will be transferred to General Reserve and balance will be retained in sinking fund a/c to facilitate future redemption. Purchase or Buy-Back of own Debentures : When a company has purchased its own debentures for immediate cancellation, a temporary account called "Debenture Redemption A/c" is opened. The accounting entries in this account are passed as under : 1. Entry of purchase of own debentures Debenture Redemption a/c Dr. To Bank a/c 2. Entry for cancellation Debenture a/c (FV) Dr. To Debenture Redemption a/c (cost) To Capital Reserve a/c (Profit) Note : The loss on cancellation should be debited to "Profit & Loss a/c". : 38 :
Purchase of own debentures as investments: When the company has purchased its own debentures and have not cancelled them on the same day then instead of opening debenture redemption account, a special account called "Investment in own debentures a/c" is opened and the accounting entries are passed as under : 1. Entry for purchase of own debentures Investment in own debentures a/c Dr. To Bank a/c 2. Entry for interest on each interest date Interest on debenture a/c (Gross) Dr. To Bank a/c (Net) To Interest on own debentures a/c 3. Entry for cancellation Debentures a/c (FV) Dr. To Investment in own Debentures a/c (cost) To Capital Reserve a/c (Profit) Note : The loss on cancellation should be debited to Profit & Loss Account. : 39 :
PART B : CLASSWORK SECTION Q. 1. The summarised Balance Sheet of Convertible Limited, as on 31st March, 2011, stood as follows : Liabilities ` Share Capital : 5,00,000 equity shares of ` 10 each fully paid 50,00,000 General Reserve 75,00,000 Debenture Redemption Fund 50,00,000 13.5% Convertible Debentures 1,00,000 Debentures of ` 100 each 1,00,00,000 Other Loans 50,00,000 Current Liabilities and Provisions 1,25,00,000 4,50,00,000 Assets : Fixed Assets (at cost less depreciation 1,60,00,000 Debenture Redemption Fund Investments 40,00,000 Cash and Bank Balances 50,00,000 Other Current Assets 2,00,00,000 4,50,00,000 The debentures are due for redemption on 1st April, 2011. The terms of issue of debentures provided they were redeemable at a premium of 5% and also conferred option to the debenture holders to convert 20% of their holding into equity shares at a predetermined price of `15.75 per share and the payment in cash. Assuming that : (i) (ii) except for 100 debenture holders holding totally 25,000 debentures, the rest of them exercised the option for maximum conversion; the investments realise ` 44 lakhs on sale; and (iii) all the transactions are put through, without any lag, on 1st April, 2011. Give Necessary Journal entries. Show your calculations in respect of the number of equity shares to be allotted and the cash payment necessary. : 40 :
Q. 2. M/s. SOLVENT LTD. intends to redeem its Secured Debts on 1st April, 2011 when its financial position indicated. SOURCES ` in Lakhs I. Own Fund : (1) Equity Share Capital 7.00 (2) Preference Share Capital 1.00 8.00 (3) Reserves & Surplus : Sinking Fund 3.85 Profit & Loss Account 0.90 4.75 12.75 II. Owed Fund : (1) 10% Debenture Stock Redeemable @ Premium of 10% 4.00 (Secured against Fixed Assets) (2) Public Deposits 0.25 4.25 Total Fund : 17.00 APPLICATIONS : I. Fixed Assets : 10.00 II. Sinking Fund Investments ` 80,000, 5% Infrastructure Bonds 0.76 ` 90,000, 6% National Defence Bonds 1.00 ` 70,000, 7 1 / 2 % State Finance Corp. Bonds 0.70 ` 1,90,000, 7% IDBI Securities 1.85 4.31 III. Net Current Assets 2.69 Total Application : 17.00 The Debenture holders were given option to get : (1) Cash on Redemption Or (2) Equity Shares of ` 10/- each @ Premium of ` 5/- per share. Or (3) 15% Debenture of ` 100/- each @ Discount of ` 12 per Debenture. Accordingly: (a) 50% Debentures holders opted for 1st option. (b) 30% Debentures holders opted for 2nd option. (c) 20% Debentures holders opted for 3rd option. (4) All investments were sold as under : (a) 5% Infrastructure Bonds @ 98. (b) 6% National Defence Bonds @ 101. (c) 7 1 / 2 % State Bonds at par. (d) 7% IDBI Securities @ 99. Pass necessary journal entries. : 41 :
Q. 3. Indebted Ltd. issued 10% debentures at par for 8 lakhs on 1st April, 2005. Interest was payable half yearly on 30th September and 31st March every year. Under the terms of the trust deed, the debentures are redeemable at par (after three years of issue) by the company purchasing them in the open market and cancelling them with a minimum redemption of ` 80,000 every year. Incase, there was a short fall in redemption by the company by open market operations, the shortfall would be made good by the company by payment on the last day of the accounting year to the trustees who would draw lots and redeem the debentures. The company purchased its own debentures for cancellation as under : (a) 31st December, 2008 ` 1,00,000 at ` 98 cum-interest. (b) 31st August, 2009 ` 60,000 at ` 95 ex-interest. (c) 31st October 2010 ` 90,000 at ` 96 cum-interest. The company carried out its obligations under the deed. Prepare the following ledger accounts for the years 2008-09, 2009-10 and 2010-11 : (i) Debentures Account, (ii) Debenture Redemption Account and (iii) Debenture Interest A/c. Ignore taxation. Q. 4. On 1st April 2008, a company issued 2,000, 6% Debentures of ` 100 each. The interest is payable on 30th September and 31st March every year. The company is allowed to purchase its own debentures which may be cancelled or kept or reissued at the company's option. The company made the following purchases by cheque in the open market : On 1st February 2009-300 Debentures @ ` 99 cum-interest. On 31st August 2009-200 Debentures @ ` 98 ex-interest. On 31st December 2010-100 Debentures @ ` 97 cum-interest. The debentures, which were purchased on 31st August, 2009 were cancelled on 31st March, 2011. All payments were made on due dates. Show Ledger Accounts to record the above transactions (including receipts and payments) and show journal entries for the year 2010-11. Q. 5. (i) Swati Associates Ltd. had issued 10,000 12% Debentures of ` 100 each on 1.4.2008. These Debentures are redeemable after 3 years at a premium of ` 5 per Debenture. Interest is payable annually. (ii) On January 1, 2009 it buys 1500 debentures from the market at ` 98 per Debenture. These are sold away on September 30, 2010 at `105 per Debenture. (iii) On April 1, 2010 it buys 1000 debentures at ` 104 per debenture from the open market. These are cancelled on July 1, 2010. (iv) On January 1, 2011 it buys 2,000 debentures at ` 106 cum - interest from the open market. These are cancelled on March 31, 2011. The other debentures are redeemed on the same date. Show ledger accounts recording all transactions. : 42 :
Q. 6. M M Ltd. had the following among their ledger opening balances as on April 1, 2010 : ` 11% Debentures A/c 50,00,000 Debenture Redemption Fund A/c. 45,00,000 13.5% Debentures in XX Ltd. A/c (Face value ` 20,00,000) 19,50,000 Own Debentures A/c. (Face value ` 20,00,000) 18,50,000 As 31st March, 2011 was the date for redemption, the company started buying own debentures and made the following purchases in the open market : 1.5.2010 : 4,000 debentures at ` 98 cum interest. 1.12.2010 : 3,000 debentures at ` 99 ex-interest. 15.3.2011 : Debentures in XX Ltd. were sold for ` 95 each cum-interest. 31.3.2011 : Debentures of MM Ltd were redeemed by payment and by cancellation. Note : The company appropriated ` 2,00,000 towards sinking fund every year. Half yearly interest is due on the debentures on the 30th September and 31st March in the case of both the companies. Show the entries in the necessary ledger accounts of MM Ltd. during 2010-2011. Q. 7. X Ltd. has issued 12% Debentures worth 4,00,000 during 2012 (Interest Dates : Sep. 30 & March 31) During 2016-2017 it Purchased following own debentures for Immediate cancellation. 30.4.16 300 Debentures @ 98 1.8.16 200 Debentures @ 99 cum-interest 1.1.17 400 Debentures @ 101 ex-interest Show Journal of X Ltd for 2016-2017 Q. 8. A company had 16,000, 12% debentures of ` 100 each outstanding as on 1st April, 2012, redeemable on 31st March, 2013. On that day, sinking fund was ` 14,98,000 represented by 2,000 own debentures purchased at the average price of ` 99 and 9% stocks face value of ` 13,20,000. The annual instalment was ` 56,800. On 31st March, 2013 the investments were realized at ` 98 and the debentures were redeemed. You are required to write up the following accounts for the year ending 31st March 2013: (1) 12% Debentures account (2) Debenture redemption sinking fund account. : 43 :