Investment Accounts

Investment accounts are the asset accounts of company. In its debit side, we will show assets purchase value and in its credit side, we will show sale value. We open different accounts for different investments. Suppose, if we invested our money in debentures, then we will open debenture account. If we invested our money in shares, we will open share accounts. Following example will clear the concept of investment accounts.


Example 

A purchased on 1st march, 5% Bat debenture stock at 90 cum -interest, interest being payable on 31st march and 30th Sept. each year, stamp and expenses on purchase amounted to and brokerage at 2% was charged on cost. Interest for the half-year was received on due date. On 1st Sept., of the stock was sold at 90 ex-interest less brokerage at 2%. On 30th Sept., stock was purchased at 91 ex-interest  plus brokerage at 2% and charges On 1st Dec., stock was sold at 94 cum interest less brokerage 2%. The market price of stock on 31st Dec. was 91%. Show the Investment Account for the year ended 31st Dec., marking all calculation in months.

Solution 

Working Notes 

* Before making investment account, I am explaining what is given in the question. Question is so simple. A has purchased Bat Debentures two times. It means these are his investment. So, in the investment account, his buying of debenture will be debit. But remember, we have to show it on cost. If there is any cum interest investment, we will deduct interest from that investment and we will show only cost for balance sheet purpose.  We will credit  sale amount of debenture.


1st Point : We will calculate value of interest which has been added in 1st march investment = 24000 X 5% X 5 month/ 12 months =

We also add  brokerage and stamp because buyer's cost will increase but interest will deduct, net cost of 1st march purchasing = (24000 X 90/100 + 432 + 20 ) - 500 = 

2nd Point : We received half year interest on our investment of 24000 = 24000 X 5% X 6 / 12 = 

3rd Point : Calculation of interest on 1st Sept investment = 10000 X 5% X 5/12 =

4th Point : We will not deduct interest on 1st Sept investment sale, because investment is ex-interest. For calculating cost, we only deduct brokerage because it is not our expenses.

= 10000 X 92 purchased price / 100 nominal price - 184 = 9016


5th Point : Calculation of interest on 30th Sept investment purchased = 8000 X 5% X 6/12 = 200

6th Point : We will not deduct interest on 30th Sept investment purchase, because it is ex-interest. For calculating cost, we only add brokerage

= 8000 X 91/100 + 146 + 10  = 7436


7th Point : We will calculate 6 months interest on balance amount of nominal investment = 24000 + 8000 - 10000 = 22000 X 5% X 6/12 = 550

8th Point : Calculation of interest on nominal value of 1st Dec. sale of investment = 6000 X 5% X 2 months/ 12 months = 50

9th Point : For calculating the cost of sale of 1st Dec. investment, we will deduct cum interest and brokerage from nominal value

= 6000 X 94/100 - 50 - 113 = 5477

10th Point : All brokerage will calculate on market price of deb. for example in 9th point we will calculate brokerage

=  6000 X 94 market price/ nominal price X 2% = 113

11th Point : Our accounts are closed in end of Dec. As per accrual system of accounting, we will calculate interest of three months from 1st Oct to 31st Dec. on the balance nominal amount of investment = (24000 +8000 - 10000 - 6000) = 16000 X 5% X 3 /12 =

12th Point : Valuation of investment at the year end on average cost basis.

Nominal value of investment purchase up to  the year end = 24000 + 8000 = 32000

Purchase price of investment up to the year end = 21552 +7436 =28988

If nominal price is 32000, then purchase price of investment is 28988

If nominal price is 1, then purchase price of investment is 28988/ 32000

If nominal price of closing investment is then cost price of closing investment = 28988 / 32000 X 16000 = 14494

13th Point : In 5% bat debenture stock investment account, we made investment and interest account together. So, credit side, we show interest received. It is not credit side of investment account but credit side of interest account. because when we receive interest, we pass following entry

Bank account Dr.XXXX

Interest Account Cr. XXXX

    5% Bat Debenture Stock ( Investment ) Account