Intermediate Course Study Material (Modules 1 to 3) Paper 1 Accounting Module - 3 BOARD OF STUDIES THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA © The Institute of Chartered Accountants of IndiaThis study material has been prepared by the faculty of the Board of Studies. The objective of the study material is to provide teaching material to the students to enable them to obtain knowledge in the subject. In case students need any Clarifications or have any suggestions to make for further improvement of the material contained herein, they may write to the Director of Studies. All care has been taken to provide interpretations and discussions in a manner useful for the students. However, the study material has not been specifically discussed by the Council of the Institute or any of its Committees and the views expressed herein may not be taken to necessarily represent the views of the Council or any of its Committees. Permission of the Institute is essential for reproduction of any portion of this material © The Institute of Chartered Accountants of India All rights reserved. No part of this book may be reproduced, stored in a retrieval system, or transmitted, in any form, or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior permission, in writing, from the publisher. Edition September, 2021 Website 2 wwwicai.org E-mail 2 [email protected] Committee/ Board of Studies Department ISBN No. Price (All Modules) z Published by : The Publication Department on behalf of The Institute of Chartered Accountants of India, ICAI Bhawan, Post Box No. 7100, Indraprastha Marg, New Delhi 110 002, India. Printed by © The Institute of Chartered Accountants of InCONTENTS MODULE! CHAPTER 1: Introduction to Accounting Standards CHAPTER 2: Framework for Preparation and Presentation of Financial Statements CHAPTER 3: — Overview of Accounting Standards MODULE II CHAPTER 4: Financial Statements of Companies CHAPTER 5: Profit or Loss Pre and Post Incorporation CHAPTER 6: — Accounting for Bonus Issue and Right Issue CHAPTER 7: Redemption of Preference Shares CHAPTER 8: Redemption of Debentures MODULE III CHAPTER 9: Investment Accounts CHAPTER 10: Insurance Claims for Loss of Stock and Loss of Profit CHAPTER 11: Hire Purchase and Instalment Sale Transactions CHAPTER 12: Departmental Accounts CHAPTER 13: Accounting for Branches Including Foreign Branches CHAPTER 14: Accounts from Incomplete Records © The Institute of Chartered Accountants of IndiaDETAILED CONTENTS: MODULE — 3 CHAPTER 9: INVESTMENT ACCOUNTS ... Learning Outcomes Chapter Overview 1. Introduction 2. Classification of Investments 3. Cost of Investments... 4, Disposal of investments 5. Reclassification of Investments .. Summary .. Test Your Knowledge .. CHAPTER 10: INSURANCE CLAIMS FOR LOSS OF STOCK AND LOSS OF PROFI }0.1 - 10.50 Learning Outcomes Chapter overview.. 1. Introduction 10.4 2. Meaning of Fire 10.4 3. Claim for Loss of StOCK nnn riedaet 10.5) 4. Claim for Loss of Profit 10.19 Summary Test Your Knowledge ... CHAPTER 11: HIRE PURCHASE AND INSTALMENT SALE TRANSACTIONS Learning Outcomes Chapter Overview 1. Introduction 2. Nature of Hire Purchase Agreement... © The Institute of Chartered Accountants of IndiaSummary... Special Features of Hire Purchase Agreement Terms Used in Hire Purchase Agreements. Ascertainment of Cash Price Ascertainment of Interest ... Accounting for Hire Purchase Transaction .. Repossession Instalment Payment System..... Difference of Hire Purchase Agreement and instalment Payment Agreement Test Your Knowledge Pmsereerecmran seoreen LA CHAPTER 12: DEPARTMENTAL ACCOUNTS .. Learning Outcomes Chapter Overview 1 Introduction 2. Advantages of Departmental Accounting 3. Methods of Departmental Accounting .. 4, Basis of Allocation of Common Expenditure among Different Departments 5. Types of Departments 6. __Inter-Departmental Transfers .. 7. Memorandum Stock and Memorandum Mark Up Account Method .... 12.19 Summary ... 1223 Test Your Knowledge 12.25 CHAPTER 13: ACCOUNTING FOR BRANCHES INCLUDING FOREIGN BRANCHES. 13.1 - 13.100 Learning Outcomes .... Chapter Overview ik Introduction ..... © The Institute of Chartered Accountants of IndiaDistinction between Branch Accounts and Departmental Accounts Dependent Branches Methods of Charging Goods to Branches Accounting for Dependent Branches Accounting for Independent Branches .. Adjustment and Reconciliation of Branch& Head Office Accounts Incorporation of Branch Balance in Head Office BOOKS «un Pen anawn Incomplete Information in Branch Books 10. Foreign Branches ... 11. Accounting for Foreign Branches 12. Techniques for Foreign Currency Translation ..... 13, Change in Classification .. Summary enn Test Your Knowledge CHAPTER 14: ACCOUNTS FROM INCOMPLETE RECORDS sce 14.1 ~ 14,69 Learning Outcomes... 144 Chapter overview ... 14.2 1. Introduction... 143 2. Types. 14d 3. Ascertainment of Profit by Capital Comparison 145 4, Techniques of Obtaining Complete Accounting Information .. 14.16 Summary 14.49 Test Your Knowledge 1450 © The Institute of Chartered Accountants of IndiaINVESTMENT ACCOUNTS MAEE 8ccountinc CHAPTER OVERVIEW [| “> Una Canaan Clee eee benefits L Deen OMe cee cael Investments Current Long-term Classification OST investments Initial recognition Cost less provision Subsequent Lower of cost and for ‘ther than recognition fair value ‘temporary’ diminution © The Institute of Chartered Accountants of IndiaINVESTMENT ACCOUNTS. WEE (G1. INTRODUCTION Investments are assets held by an enterprise for earning income by way of dividends, interest and rentals, for capital appreciation, or for other benefits to the investing enterprise. Investment Accounting is done as per AS 13, Accounting for Investments which deals with accounting for investments in the financial statements and related disclosure requirements except: (i) Bases for recognition of interest, dividends and rentals earned on investments; (ii) operating or financial lease (iii) investment of retirement benefit plans and life insurance enterprises; (iv) mutual funds, etc. Note: Assets held as Stock-in-trade are not ‘Investments’. G2. CLASSIFICATION OF INVESTMENTS The investments are classified into two categories as per AS 13, viz,, Current Investments and Long-term Investments 2.1 Current Investments + Acurrent Investment is an investment that is by its nature readily realisable and is intended to be held for not more than one year from the date on which such investment is made. Example: A Ltd. acquired 1,000 shares of B Ltd. on Ist April, 20X1 with an intention to hold them for a period of 15 months. Suggest the classification of such investment (in accordance with AS 13) as on 31st March, 20X2. Investment in 1,000 shares is not a current investment because it is intended to be held for more than one year from the investment date even though the remaining period as on the reporting date may be less than one year. * The carrying amount for current investments is the lower of cost and fair value. * Fair Value is the 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 realisable value provides an evidence of fair value. ‘© The Institute of Chartered Accountants of In* Market Value is the amount obtainable from the sale of an investment in an ‘open market, net of expenses necessarily to be incurred on or before disposal. * Any reduction to fair value and any reversals of such reductions are included in the statement of profit and loss. 2.2 Long-term Investments * Along-term investment is an investment other than a current investment. * Long term investments are usually carried at cost. * If there is a decline, other than temporary, in the value of a long term investment; the carrying amount is reduced to recognise the decline. * The reduction in carrying amount is charged to the statement of profit and loss. + The reduction in carrying amount is reversed when there is a rise in the value of the investment, or if the reasons for the reduction no longer exist. Valuation == Soe individual = ‘where there i a decline, other than emporaryin the carrying amounts of Tong term valued investments, the resultant reduction inthe. catying ‘amount Is charged to the profit and Toss statement. The reduction In carrying amount is reversed when there ts a rise in the valle of the investment, oF if the reasons for the ‘eduction a longer exis. ‘on overall (or global) base te not eonsisered ‘ppropriate; prudent method is to. cary investment individual ‘Any reduction to far value is debited to profit and loss account, however, If far value of Investment is increased subsequently, the increase in value of current investment up fo the cost ot investment 6 eedited to the profit and loss account! (and excess portion, If any, is Fgnored) © The Institute of Chartered Accountants of IndiaINVESTMENT ACCOUNTS. WI (G3. COST OF INVESTMENTS 1. The cost of an investment includes acquisition charges such as brokerage, fees and duties 2. fan investment is acquired, or partly acquired, by the issue of shares or other securities, the acquisition cost is 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, or part exchange, for another asset, the acquisition cost of the investment is determined by reference to the fair value of the asset given up or the fair value of the investment acquired, whichever is more clearly evident. Cash/ bank. Cash price including charges such as brokerages, fees and duties Issue of shares/ other securities | Fair value of securities issued In exchange for another asset _| Fair value of asset given up or fair value of investment acquired, whichever is more clearly evident 3. Aseparate Investment Account should be made for each scrip purchased. The scrips purchased may be broadly divided into two categories, viz. Categories of Investment on the basis of Income Fixed income bearing scrips | | Variable income bearing scrips. e.g. Government securities; eg, Equity shares debentures or bonds The entries in Investment Account for these two broad categories of scrips will be made as under: (i) Fixed income Bearing Securities: These refer to securities having fixed return of income. Investment in Government securities or debentures comes under this category. ‘© The Institute of Chartered Accountants of InTransaction for fixed income bearing securities may occur on following basis: (2) _Ex-interest basis (b) Cum: interest basis In case the transaction is on ‘Ex-interest’ basis, the amount of interest accrued to the date of transaction has to be paid in addition to the price of security. The following entries are made in the books of Purchaser: Investment Account Dr. | (With the price settled on ex- interest basis)* Interest accrued Account | Dr. | (Accrued interest till the date of transaction)** To Bank A/c (With total amount paid) * This amount will appear in Capital Column of ‘Investment A/c’ “This amount will appear in Income/Interest Column of ‘investment A/c’ In case the transaction is on cum-interest basis, a part of purchase price is related to the interest accrued from the date of the last interest paid to the date of transaction. Hence, in this case, the cost of investment has to be calculated by subtracting the amount of accrued interest from the Purchase Price. The following entries are made in the books of Purchaser: Investment Account Dr. | (With the price settled on cum- interest less Interest Accrued)* Interest accrued Account | Dr. | (Accrued interest till the date of transaction)** To Bank A/c (With total amount paid) * This amount will appear in Capital Column of ‘Investment A/c’ “This amount will appear in Income/Dividend Column of ‘investment A/c’ When the interest amount is actually received, it is entered in the Income Column credit side. The net effect of these entries will be that the amount credited to the income will be only the interest arising between the date of purchase and the one on which it next falls due. © The Institute of Chartered Accountants of InINVESTMENT ACCOUNTS. I Note: (a) _ Interest amount is always calculated with respect to nominal value (par value/ nominal value). (b) Incase the quotation does not specify whether it is ex-interest or cum-interest, the same will be treated as ex-interest quotation as per the general practice (i) Variable Income Bearing Securities: These refer to securities having variable return of income. Investment in equity shares comes under this category. The following points should be noted with respect to investment in equity shares: (a) dividends from investments in shares are not recognised in the statement of profit and loss until a right to receive payment is established; (b) the amount of dividend accruing between the date of last dividend payment and the date of purchase cannot be immediately ascertained. In the following way the information is incorporated in the books of investor at the time of purchase: Investment Account | Dr. | (With the entire purchase price)* To Bank A/c (With total amount paid) * This amount will appear in Capital Column of ‘Investment A/c’. The adjustment with respect to dividend is made when the dividend is actually received as under: Bank A/c Dr. | (with total dividend received) To Investment A/c |with the amount of dividend for the period for which the investor did not hold the share)* To Dividend A/c (with the amount of dividend for the post = acquisition period)** *This amount will appear in Capital Column of ‘Investment A/c’. “This amount will appear in Income/Dividend Column of ‘Investment A/c’. © The Institute of Chartered Accountants of India* The important point with respect to investment in equity shares is that the amount of dividends for the period, for which the shares were not held by the investor, should not be treated as revenue receipt but they should be treated as capital receipt, i.e, when dividends on equity shares are declared from pre-acquisition profits, the amount of such dividend received by the investor is entered on the credit side in the capital column, so as to reduce the acquisition cost. ‘+ If itis difficult to make an allocation between pre and post-acquisition periods except on an arbitrary basis, the cost of investment is normally reduced by dividends receivable, only if they clearly represent recovery of part of the cost. 4, When right shares offered are subscribed for, the cost of the right shares is added to the carrying amount of the original holding. When right shares offered are | Cost of right shares should be added to subscribed carrying amount of the original holding. If rights are not subscribed | Sale proceeds should be taken to for but are sold statement of profit and loss (refer note below for an exception). Note: Where the investments are acquired on cum-right basis and the market value of investments immediately after their becoming ex-right is lower than the cost for which they were acquired, it may be appropriate to apply the sale proceeds of rights to reduce the carrying amount of such investments to the market value. For eg. Mr. X acquires 200 shares of a company on cum-right basis for % 50,000. He subsequently receives an offer of right to acquire fresh shares in the company in the proportion of 1:1 at % 110 each. X subscribes for the right issue. Thus, the total cost of X's holding of 400 shares would amount to % 72,000 (50,000 + 22,000). Suppose, he does not subscribe but sells the rights for @ 15,000. The ex-right market value of 200 shares bought by X immediately after the rights falls to © The Institute of Chartered Accountants of IndiaINVESTMENT ACCOUNTS. WI % 40,000. In this case out of sale proceeds of € 15,000, 10,000 may be applied to reduce the carrying amount to the market value % 40,000 and & 5,000 would be credited to the profit and loss account. 5. Where an investment is acquired by way of issue of bonus shares, no amount is entered in the capital column of investment account since the investor has not paid anything. G 4. 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 a part of the holding of an individual investment is disposed, the carrying amount is required to be allocated to that part on the basis of the average carrying amount of the total holding of the investment. + In respect of shares, debentures and other securities held as stock-in-trade, the cost of stocks disposed of may be determined by applying an appropriate cost formula (e.g, first-in, first-out (FIFO), average cost, etc.). These cost formulae are the same as those specified in AS 2, Valuation of Inventories. When part of Pee a TSS Cie Be Ee RS Cena Taal) TSC ear Pierre eee De Penn ood seaieee htt) Reeser eu Eee ale Tri disposed calculated Pe eges att) pees XP) © The Institute of Chartered Accountants of India(Fixed Income Bearing Securitie: In case the transaction is on ‘Cum-interest basis’, the amount of accrued interest from the date of last payment to the date of sale is credited in the income column and only the sale proceeds, net of accrued interest (from the date of last payment to the date of sale), is credited in the capital column of investment account. In case the transaction is on ‘Ex-interest' basis, entire sale proceeds is credited in the capital column and the amount of accrued interest from the date of last payment to the date of sale, separately received from the buyer will be taken to the credit side of the income column of investment account. (ii) Variable Income Bearing Securities: In case of these securities, the entire amount of sale proceeds should be credited in the capital column of investment account, unless the amount of accrued specifically established. The entries in the books at the time of sale of investments will be just the idend can be reverse of the entries passed for their acquisition. Transaction on| Purchase price of exinterest | investment, ie, no basis impact of __ interest accrued upto the date of transaction Entire sale proceeds from investments, i.e no impact of accrued interest (from the date of last payment to the date of sale) Transaction on| Purchase price of cum-interest | investment less accrued basi interest upto the date of transaction Sale proceeds, net of accrued interest (from the date of last payment to the date of sale) Mlustration 1 In 20X1, M/s. Wye Ltd. issued 12% fully paid debentures of * 100 each, interest being payable half yearly on 30th September and 31" March of every accounting year. On Ist December, 202, M/s, Bull & Bear purchased 10,000 of these debentures at #101 ex-interest price, also paying brokerage @ 1% of ex-interest amount of the purchase. On Ist March, 20X3 the firm sold all these debentures at ¢ 103 ex-interest price, again paying brokerage @ 1 % of ex-interest amount. Prepare Investment Account in the books of M/s. Bull & Bear for the period 1 December, 20X2 to 1* March, 20X3. ‘© The Institute of Chartered Accountants of InINVESTMENT ACCOUNTS. Si Solution In the books of M/s Bull & Bear Investment Account for the period from 1*t December 20X2 to 1** March, 20X3 (Scrip: 12% Debentures of M/s. Wye Ltd.) h.1220%2| To Bank Ae] 10004 1020.109 1.0320%3] By Bank Ne| ror97% wna) (wn) 1.320x3 | To Proftae 1320 |py Profit ae los Net osc of (bs) ‘aon0eq| sacod| 10201 frasneed|_soood 1020.10 * This represents income for M/s. Bull & Bear for the period 1* December, 20X2 to 1 March, 20X3, ie,, interest for three months- 1" December, 20X2 to 28 February, 20X3). Working Notes: 1. Cost of 12% debentures purchased on 1.12.20X2 of Cost Value (10,000 x % 101) = 10,10,000 Add: Brokerage (1% of % 10,10,000) = 10,100 Total = 10,20,100 2 Sale proceeds of 12% debentures sold z Sales Price (10,000 x % 103) a 10,30,000 Less: Brokerage (1% of & 10,30,000) = (10,300) Total = 1919700 Mlustration 2 On 1.420X1, Mr. Krishna Murty purchased 1,000 equity shares of # 100 each in TELCO Ltd. @ # 120 each from a Broker, who charged 2% brokerage. He incurred 50 paise per #100 as cost of shares transfer stamps. On 31.1.20X2, Bonus was declared in the ratio of 1: 2. Before and after the record date of bonus shares, the shares were quoted at #175 per share and #90 per share respectively. On 31.3.20X2, Mr. Krishna Murty sold bonus shares to a Broker, who charged 2% brokerage. © The Institute of Chartered Accountants of IndiaShow the Investment Account in the books of Mr. Krishna Murty, who held the shares as Current assets and closing value of investments shall be made at Cost or Market value whichever is lower. Solution In the books of Mr. Krishna Murty Investment Account for the year ended 31st March, 20X2 (Scrip: Equity Shares of TELCO Ltd.) 1420x1|To Bank — A/c) 1,00,000) 1,23,000|31.320x2|By Bank A/c) 50,000] 44,100| aN) (wN2) 31.1.20X2|To Bonus shares} 50,000} '31.3.20X2|By Balance c/d (WS) (WN4) — | 1,00,000| 82,000] 313.20X2|To Profit & loss Alc (W.N3) =| 3,109] 1,50,000] 1,26,100| 1,50,000] 1,26,100| Working Notes: 1. Cost of equity shares purchased on 1.4.20X1 = (1,000 xt 120) + (2% of % 1,20,000) + (7% of & 1,20,000) = & 1,23,000 2. Sale proceeds of equity shares (bonus) sold on 31st March, 20X2= (500 x 90) — (2% of & 45,000) = % 44,100. 3. Profit on sale of bonus shares on 31st March, 20X2 = Sale proceeds ~ Average cost Sale proceeds = % 44,100 Average cost = & (1,23,000 /1,50,000) x 50,000 = % 41,000 Profit = & 44,100 -& 41,000 = & 3,100. 4, Valuation of equity shares on 31st March, 20X2 Cost = (® 1,23,000/1,50,000) x 1,00,000 = = 82,000 Market Value = 1,000 shares x % 90 = % 90,000 Closing balance has been valued at € 82,000 being lower than the market value. 5. Bonus shares do not have any cost. © The Institute of Chartered Accountants of IndiaINVESTMENT ACCOUNTS. WI Mlustration 3 Mr. X purchased 500 equity shares of # 100 each in Omega Co. Ltd. for 62,500 inclusive of brokerage and stamp duty. Some years later the company resolved to capitalise its profits and to issue to the holders of equity shares, one equity bonus share for every share held by them. Prior to capitalisation, the shares of Omega Co. Ltd. were quoted at €175 per share. After the capitalisation, the shares were quoted at * 92.50 per share. Mr. X. sold the bonus shares and received at #90 per share. Prepare the Investment Account in X's books on average cost basis. Solution In the books of X Investment Account [Scrip: Equity shares in Omega Co. Ltd.] To Cash 50,000] 62,500] By Cash - Sale (500 x 90) [To Bonus shares (W.N.1) | 50,000} By Balance c/d (WN. 3) [To P&L A/c (WN. 2) -| 13,750} 1,00,000| 76,250, 1,00,000| 76,250 [To Balance b/d 50,000] 31,250 Working Notes: 1. Bonus shares do not have any cost. 2. Profit on sale of bonus shares = Sales proceeds ~ Average cost Sales proceeds = % 45,000 500 _, 62,500 = & 31,250 1,000 % 45,000 - %31,250 = % 13,750. 3. Valuation of Closing Balance of Shares at the end of year Average cost Profit The total cost of 1,000 share including bonus is 62,500 300 x 62,500 = 31,250 Therefore, cost of 500 shares (carried forward) is ; © The Institute of Chartered Accountants of IndiaMarket price of 500 shares = 92.50 x 500 = ¢ 46,250 Cost being lower than the market price, therefore shares are carried forward at cost. Mlustration 4 On 01-04-20X1, Mr. T. Shekharan purchased 5,000 equity shares of 7 100 each in V Ltd. @ ¥ 120 each from a broker, who charged 2% brokerage. He incurred 50 paisa per #100 as cost of shares transfer stamps. On 31-01-20X2 bonus was declared in the ratio of 1: 2, Before and after the record date of bonus shares, the shares were quoted at 175 per share and #90 per share respectively. On 31-03-20X2, Mr. T. Shekharan sold bonus shares to a broker, who charged 2% brokerage. Show the Investment Account in the books of T. Shekharan, who held the shares as Current Assets and closing value of investments shall be made at cost or market value whichever is lower. Sol In the books of T. Shekharan Investment Account for the year ended 31st March, 20X2 (Script: Equity Shares of V Ltd.) 1.4.20x1 |To Bank A/c} 5,00,000| 6,15,000) 31.3.20x2 | By Bank A/c| 2,50,000| 220,500) (wna) (wna) 31.1.20x2 |To Bonus 250,000] -|31320x2| By Balance | 5,00,000|4,10,000' 313.20X2 | To shares od Profit and Loss A/c| (wna) (wna) 15,500) 7,50,000| 630,500 7,50,000] 630,500, 1g Notes: 1. Cost of equity shares purchased on 1" April, 20X1 = Cost + Brokerage + Cost of transfer stamps = (5,000 x 120) + (2% of € 6,00,000) + (72% of ® 6,00,000) = %6,15,000 © The Institute of Chartered Accountants of IndiaINVESTMENT ACCOUNTS. Wi 2. Sale proceeds of equity shares sold on 31% March, 20X2 = Sale price ~ Brokerage = (2,500 x & 90) ~ (2% of ® 2,25,000) = &2,20,500 3. Profit on sale of bonus shares = Sales proceeds - Average cost Sales proceeds = %2,20,500 Average cost = & (6,15,000 /7,50,000) x 2,50,000 = & 2,05,000 Profit, = ¥ 220,500 — & 2,05,000= & 15,500. 4, Valuation of equity shares on 31® March, 20X2 Cost = € [615,000 x 5,00,000/7,50,000} = % 4,10,000, ie. € 82 per share Market Value = 5,000 shares x € 90 = € 4,50,000 Closing stock of equity shares has been valued at ® 4,10,000 i.e. cost being lower than the market value. Mlustration 5 On 1 April, 20X1, Rajat has 50,000 equity shares of P Ltd. at a book value of # 15 per share (nominal value @ 10 each). He provides you the further information: (1) On 20" June, 20X1 he purchased another 10,000 shares of P Ltd. at ® 16 per share. (2) On T* August, 20X1, P Ltd. issued one equity bonus share for every six shares held by the shareholders. (3) 031" October, 20X1, the directors of P Ltd. announced a right issue which entitles the holders to subscribe three shares for every seven shares at % 15 per share. Shareholders can transfer their rights in full or in part. Rajat sold 1/3" of entitlement to Umang for a consideration of #2 per share and subscribed the rest on 5" November, 20X1 You are required to prepare Investment A/c in the books of Rajat for the year ending 31" March, 20X2. © The Institute of Chartered Accountants of IndiaSolution In the books of Rajat Investment Account (Equity shares in P Ltd.) To Balance b/d 313X2 |By Balance cfd To Bank A/c @al. fig) To Bonus issue (WN) To Bank A/c (right shares) Wor 1g Notes: (1) Bonus shares }0,000 shares 50,000 + 10,000 +10,000 3 ~ 36,090 shares 2) Right shares , (3) Sale of rights 30,000 shares x 1x % 2= & 20,000 to be credited to statement of profit and loss (4) Rights subscribed = 30,000 shares x2 x 15 = © 3,00,000 Mlustration 6 On 1.4.20X1, Sundar had 25,000 equity shares of ‘X’ Ltd. at a book value of 7 15 per share (Nominal value # 10). On 20.6.20X1, he purchased another 5,000 shares of the company at #16 per share. The directors of ‘X’ Ltd. announced a bonus and rights issue. No dividend was payable on these issues. The terms of the issue are as follows: Bonus basis 1:6 (Date 16.8.20X1). Rights basis 3:7 (Date 31.8.20X1) Price #15 per share. Due date for payment 30,9.20X1. © The Institute of Chartered Accountants of IndiaINVESTMENT ACCOUNTS. i Shareholders were entitled to transfer their rights in full or in part. Accordingly, Sundar sold 33.33% of his entitlement to Sekhar for a consideration of #2 per share. Dividends: Dividends for the year ended 31.3.20X1 at the rate of 20% were declared by X Ltd. and received by Sundar on 31.10.20X1. Dividends for shares acquired by him on 20.6.20X1 are to be adjusted against the cost of purchase. On 15.11.20X1, Sundar sold 25,000 equity shares at a premium of ®5 per share. You are required to prepare in the books of Sundar. (1) Investment Account (2) Profit & Loss Account. For your exercise, assume that the books are closed on 31.12.20X1and shares are valued at average cost. Solution Books of Sundar Investment Account Equity Shares in X Ltd.) 1420x1 | ToBalb/d | 25,000] 3,75,000] 31.1020x1 | By Bank) —| 10,000 20620X1 | To Bank 5,000] 80,000 (dividend 168.20X1 | ToBonus | 5,000 - fon shares WN) acquired on 30920x1 |ToBank | 10000] 150,000 20/6/20X1) Rights (wna) Shares) (W.N3) 15.11.20X1|To Profit 44,444 15.11.20x1 | By Bank | 25,000 3,75,000 (on sale of Gale of shares) shares) 31.1220x1 | By Bal. c/d | 20,000] 2,64,444 wne) 45,000| 649,444 45,000 | 649,444 © The Institute of Chartered Accountants of IndiaProfit and Loss Account (An extract) aM To Balance c/d 1,04,44a | By Profit transferred 44444 By Sale of rights (W.N.3) | 10,000 By Dividend (W.NA) 150,000 1,04,444 1,04,444 Working Notes: 25,000+5,000 Bonus Shares = (25:000+5.000) _ 5 a9 shares 25,000 + 5,000 + 5,000 Right Shares = (25:000*5.000+5,000) 5 _ 15,099 shares Q @) (4) 7 Right shares renounced = 15,000x1/3 = 5,000 shares Sale of right shares = 5,000 x 2 = % 10,000 Right shares subscribed = 15,000 - 5,000 = 10,000 shares Amount paid for subscription of right shares = 10,000 x 15 = % 1,50,000 Dividend received = 25,000 (shares as on 1* April 20X1) x 10 x 20% = % 50,000 Dividend on shares purchased on 20.6.20X1 = 5,000x10x20% = € 10,000 is adjusted to Investment A/c Profit on sale of 25,000 shares = Sales proceeds - Average cost Sales proceeds = € 3,75,000 Profit = %3,75,000- % 3,30,556= 744,444. Cost of shares on 31.12.20X1 (3,75,000 + 80,000 +1,50,000 -10,000) 20,000 = & 2,64,444 45,000 © The Institute of Chartered Accountants of IndiaINVESTMENT ACCOUNTS. Wa Illustration 7 On Ist January 20X1, Singh had 20,000 equity shares in X Ltd. Nominal value of the shares was #10 each but their book value was # 16 per share. On Ist June 20X1, Singh purchased 5,000 more equity shares in the company at a premium of #4 per share. ‘On 30th June, 20X1, the directors of X Ltd. announced a bonus and rights issue. Bonus was declared at the rate of one equity share for every five shares held and these shares were received on 2nd August, 20X1. The terms of the rights issue were: (@) Rights shares to be issued to the existing holders on 10th August, 20X1. (0) Rights issue would entitle the holders to subscribe to additional equity shares in the Company at the rate of one share per every three held at * 15 per share-the whole sum being payable by 30th September, 20X1. (©. Existing shareholders were entitled to transfer their rights to outsiders, either wholly or in part. (d) Singh exercised his option under the issue for 50% of his entitlements and the balance of rights he sold to Ananth for a consideration of % 1.50 per share. (@) Dividends for the year ended 31st March, 20X1, at the rate of 15% were declared by the Company and received by Singh on 20th October, 20X1. () On Ist November, 20X1, Singh sold 20,000 equity shares at a premium of ®3 per share. The market price of share on 31-12-20X1 was @ 14, Show the Investment Account as it would appear in Singh's books on 31-12-20X1 and the value of shares held on that date. Solution Investment Account-Equity Shares in X Ltd. 20x1 0x1 an. |To —Bal.| 20,000) -| 320000] oct 20|8y Bank 30000] 7,500) bya (dividend) [20.000 «| 10x 15%), (5,000 x 10] 15%), © The Institute of Chartered Accountants of Indiafuse t ToBank | 5000 =] 70000] Now.1 [By Bank | 20,000 60,000 JAug.2.|To Bonus| 5000 —|Nowt Jay P&L 1429 Issue Arc W.N2) sep.30|To Banke] 5,000 -| 75000] Dec. 31) By Balance | 15,000 96071 igh) Jia wN3) (wnat) Dec3t |To Profit 30000 & Loss Alc (OWvidend income) 35000| 30000] 465,000 35000| 30000] 465,000 Jan. 1,|To 15000) 196071 1. Right shares No. of right shares issued = (20,000 + 5,000 + 5,000)/ 3 = 10,000 shares No. of right shares subscribed = Amount of right shares issued = No. of right shares sold = 10,000 ~ 5,000 = 10,000 x 50% = 5,000 shares 5,000 x 15 = % 75,000 3,000 shares Sale of right shares = 5,000 x 1.5 = % 7,500 to be credited to statement of profit and loss 2. Cost of shares sold — Amount for 35,000 shares (@3,20,000 + & 70,000 + @ 75,000) Less: acquisition period) Cost of 35,000 shares Cost of 20,000 shares (Average cost basis) Sale proceeds Loss on sale 4,65,000 idend on shares purchased on June 1 (since the dividend | (7,500) pertains to the year ended 31 March, 20x1, ie, the pre- 4,57,500 2,61,429 2,60,000 1,429 © The Institute of Chartered Accountants of IndiaINVESTMENT ACCOUNTS. We 3. Value of investment at the end of the year Assuming investment as current investment, closing balance will be valued based on lower of cost or net realisable value. Here, Net realisable value is €14 per share ie. 15,000 shares x & 14 = & 2,10,000 4,57,500 35,000 end of the year will be 1,96,071. and cost = 15,000 = & 1,96,071. Therefore, value of investment at the Ilustration 8 A Limited purchased 5,000 equity shares (nominal value ¢ 100 each) of Allianz Limited for #105 each on 1" April, 20X1. The shares were quoted cum dividend. On 15" May, 20X1, Allianz Limited declared & paid dividend of 2% for year ended 31" March, 20X1. On 30 June, 20XT7 Allianz Limited issued bonus shares in ratio of 1:5. On 1 October, 20X1 Allianz Limited issued rights share in the ratio of 1:12 @ 45 per share. A Limited subscribed to half of the rights issue and the balance was sold at #5 per right entitlement. The company declared interim dividend of 1% on 30" November, 20X17. Right shares were not entitled to dividend. The company sold 3,000 shares on 31 December, 20X1 at #95 per share. The company A Ltd. incurred 2% as brokerage while buying and selling shares. You are required to prepare Investment Account in books of A Ltd for the year ended 31" March, 20X2. Solution In the books of A Ltd. Investment in equity shares of Allianz Ltd. for the year ended 31" March, 20X2 20x [2oxt JApri1|To Bank Ave} 5,000] -|535500|May 15. By Bank A/c 5 =| 10000] waa) dividenc) wns) lwune [To Bonus} 1,000] : -|Now.30 By Bank Aye -| 6000) 30 Issue (Ww 2) interim Joct1 |To Bank Aye} 250] -| 11250 divider) cwN.7) wna) Dec31)To P & L A/c : -| 21,660|Dec.31 Jay Bank ave | 3.000} -| 279300] was) (WA.5) © The Institute of Chartered Accountants of India20%2 feoxe March To P & L Ave -| 6000] -|March_ by Balance es 31 feo 31 WN 3.250] -| 279,110 6250] 6000| 568470 6250] 6000] 5.68410 Working Notes: 1. Calculation of cost of purchase on 1* April, 20X1 % 105 X 5,000 shares = % 5,25,000 Add: Brokerage (2%) = % 10,500 ©5,35,500 2. Calculation of number of bonus shares issued Bonus Shares = 290 .1=1,000 3. Calculation of right shares subscribed Right Shares = £000 500 shares Shares subscribed = a =250shares Value of right shares subscribed = 250 shares @ € 45 per share = € 11,250 4. Calculation of sale of right entitlement 250 shares x ® 5 per share = % 1,250 (Amount received from sale of rights will be credited to P&L a/c) 5. Calculation of profit on sale of shares Totalholding = ~—*§,000 shares original 1,000 shares bonus 250 shares right shares 6,250 shares 3,000 shares were sold on 31.12.20X1 Cost of total holdings of 6,250 shares (on average basis) = € 5,35,500 + % 11,250 10,000 = & 5,36,750 © The Institute of Chartered Accountants of IndiaINVESTMENT ACCOUNTS "NC Average cost of 3,000 shares would be = 5.36750 3,099 = € 2,57,640 6,250 z Sale proceeds of 3,000 shares (3,000 x 95) 2,85,000 Less: 2% Brokerage (5,700) 2,79,300 Less: Cost of 3,000 shares (2.57.640) Profit on sale 21,660 Dividend received on investment held as on 15" May, 20X1 = % 10,000 (5,000 x % 100 x 2%) adjusted to Investment A/c Dividend amounting € 6,000 received on 30.11.20X1 will be credited to P&L A/c Calculation of closing value of shares (on average basis) as on 31" March, 20X2 5,36,750 6,250 Illustration 9 %3,250= €2,79,110 The following transactions of Nidhi took place during the year ended 31st March 20X2: Ist April 12th April Ist May 15th May Ist October Ist November 1st December Purchased # 12,00,000, 8% bonds of # 100 each at # 80.50 cum- interest. Interest is payable on Ist November and 1st May. Purchased 1,00,000 equity shares of % 10 each in X Ltd. for 7 40,00,000 Received half-year interest on 8% bonds. X Ltd, made a bonus issue of three equity shares for every two held. Nidhi sold 1,25,000 bonus shares for 720 each Sold % 3,00,000, 8% bonds at 781 ex-interest. Received half-year's bond interest. Received 18% interim dividend on equity shares (including bonus shares) in X Ltd. Prepare the relevant investment account in the books of Nidhi for the year ended 31st March, 20X2. © The Institute of Chartered Accountants of IndiaSolution In the books of Nidhi 8% Bonds Account Interest Payable: 1st November & 1st May] 1420x1 [To Bank A/c 1200000] 40.000] 926000] 15.20x1 | By Bank A/c ~| 48000 - own) (1200000 x 8% 6/12) 1.102081 | To Profit & 1130.20x1 | By Bank Ave los Ale wna | 300000] 19000] 243000 wNe 11500 41.11.2001 | By Bank Ave =| 36000 : (wN3) 313.2002 | To Proft & 313.202 | By Balance Loss We 84,000 cfdcwnné) | 9.00000] 30000 | 694500 ‘200000 1.24000 | 937.500 1200000 | 124000 | 937.500 Investment in Equity Shares of X Ltd. Account 1242011 |To Bork Ale | 100000 400000 | 15520x1] By Bork Ave | 125000) 2500000 1552011 |To Bonus issue | 150000 11220%1 By Bank Ale 225000] 15520%1 | To Prof & Loss 5500000 own) Ave OWNS) 3132002 | To Profit & Loss 313202 By Balance| Ate 225000) jaws) | 125000 ‘2000000 '2s0000| 225000] 4500000 .250000| 225000] 4500000 Working Notes: 1. Cost of investment purchased on 1* April, 20X1 12,000, 8% bonds were purchased @ & 80.50 cum-interest. Total amount paid 12,000 bonds x & 80.50 = 9,66,000 which includes accrued interest for 5 months, ie, 1° November, 20XX to 31%March, 20X1. Accrued interest will be % 12,00,000 x 8/100x 5/12 = % 40,000. Therefore, cost of investment purchased = % 9,66,000 ~ 40,000 = 29,26,000. © The Institute of Chartered Accountants of IndiaINVESTMENT ACCOUNTS. — 2. Sale of bonds on 1* October, 20X1 3,000 bonds were sold@ % 81 ex-interest, i.e, Total amount received = 3,000 x 81 + accrued interest for 5 months = 2,43,000 +%10,000 (3,00,000 x 8/100 x 5/12) 3. __ Interest received on 1* November, 20X1 Interest will be received for 9,000 bonds @ 8% for 6 months, i.e., € 9,00,000 x 8/100x1/2 = % 36,000. 4. Cost of bonds on 31.3.20X1 Cost of bonds on 31.3.20X1 will be % 9,26,000/ 12,000 x 9,000 = % 6,94,500. Interest accrued on bonds on 31.3.20X1 = 9,00,000 x 8% x 5/12 = 730,000 5. _ Profit on sale of bonus shares Cost per share after bonus = & 40,00,000/ 2,50,000 = & 16 (average cost method being followed) Profit per share sold (@ 20-% 16) = 74, Therefore, total profit on sale of 1,25,000 shares = & 4 x 1,25,000 = & 5,00,000. 6. Profit on sale of bonds zg Sale value = 2,43,000 Cost of %3,00,000 8% bonds = 9,26,000/12,00,000 x 3,00,000 =__2,31,500 Profit =__11,500 7. Dividend on equity shares = 1,25,000 x 10 x 18% = @ 2,25,000 8 Value of equity shares at end of year Cost per share after bonus = 7 16 Number of shares = 1,25,000 Value of equity shares at end of year = 1,25,000 x 16 = % 20,00,000 Mlustration 10 Smart Investments made the following investments in the year 20X1-X2. 12% State Government Bonds having nominal value 7100 © The Institute of Chartered Accountants of India01.04.20X1 Opening Balance (1200 bonds) book value of * 126,000 02.05.20X1 Purchased 2,000 bonds @ % 100 cum interest 30,09.20X1 Sold 1,500 bonds at % 105 ex interest Interest on the bonds is received on 30" June and 31 Dec. each year. 15.04.20X1 Purchased 5,000 equity shares @ #200 on cum right basis; Brokerage of 1% (on cum-right price) was paid in addition (Nominal Value of shares @ 10) 03.06.20X1 The company announced a bonus issue of 2 shares for every 5 shares held. 16.08.20X1 The company made a rights issue of 1 share for every 7 shares held at * 250 per share. The entire money was payable by 37.08.20X1. 22.8.20X1 Rights to the extent of 20% was sold @ % 60. The remaining rights were subscribed. 02.09.20X1 Dividend @ 15% for the year ended 31.03.20X1 was received on 16.09.20X1 15.1220X1 Sold 3,000 shares @ % 300. Brokerage of 1% was incurred extra. 15.01.20X2 Received interim dividend @ 10% for the year 20X1 -X2 31.03.20X2 The shares were quoted in the stock exchange @ #220 Prepare Investment Accounts in the books of Smart Investments. Assume that the average cost method is followed and no dividend is received on bonus shares as bonus shares are declared on 3.6.20X1 and dividend pertains to the year ended 31.03.20X1. Solution In the books of Smart Investments 12% Govt. Bonds for the year ended 31° March, 20X2 114x1_ [To Opening 00| 3600] 1.26000] 306x1 | By Bank 200 © The Institute of Chartered Accountants of IndiaINVESTMENT ACCOUNTS. Se Thlonce b/d eres) wn (200 x 100 x 12% 6/12) asx1 |rosank Ac} 2000) 000) 192000] a09xt | ay sank Acqwnia] 1500] 4500] 157500 wn awng) ooxi |Top & L Nec aaa7so| aux2x1|y Bank Ne] | 10.200 | Crofton rere Sale) WN) (170 x 100 12% x 6/12) s13x2 fropaiare 27400 31302 | By Bal cd WN2| 1700| 5:100|16893750] overs) awnno, 3200| 29000] 32643750 3200] _ 38000) 32643750 Investments in Equity shares of X Ltd. for year ended 31.3.20X2 jsaxi [To Bank Ae} 5.00] 110,000 wna 6x1 ro Boras | 2000) | -| r69x1 | by aank | | 7500 sue (Dwvidend) (5,000 x 10) x 15%) (refe note 1 and2) siexi |ro ank Ac} 00 2.0000) 1512 |By Banks | 3000 -|_ 231000 owns) wna) jsaxt |ro P au ad 4428500] 15.122 | By Bank 4800 wns) Ginterin ddend) wna) siax2 |to PaLAre 44800 sayz By Bal. {4800 7.40 000 (WINS) 7200] 4800) 1638500 7200] _400| 1638500 Working Notes: 1. Profit on sale of bonds on 30.9.X1 = Sales proceeds - Average cost Sales proceeds = €1,57,500 (i.e, 1,500 x 105) ‘© The Institute of Chartered Accountants of IncAverage cost = & [(1,26,000+1,92,000) x1,500/3,200] = 1,49,062.50 Profit = 1,57,500-% 1,49,062.50=%8,437.50 2. Valuation of bonds on 31* March, 20X2 Cost = %3,18,000/3,200 x1,700 = 1,68,937.50 3. Cost of equity shares purchased on 15/4/20X1 = Cost + Brokerage = (5,000 x¥ 200) + 1% of (5,000 »& 200) = 10,10,000 4, Sale proceeds of equity shares on 15/12/20X1 = Sale price - Brokerage = (3,000 x& 300) ~ 1% of (3,000 x¥ 300) = 8,917,000. 5. Profit on sale of shares on 15/12/20X1 ales proceeds - Average cost Sales proceeds = %8,91,000 [(10,10,000+2,00,000-7,500) x 3,000/7,800] = & [12,02,500 x 3,000/7,800] = 4,62,500 Average cost Profit = © 8,91,000 ~ %4,62,500=% 4,28,500. 6. _ Valuation of equity shares on 31% March, 20X2 Cost = & [12,02,500x 4,800/7,800]= & 7,40,000 Market Value = 4,800 shares x 220 = % 10,56,000 Closing stock of equity shares has been valued at & 7,40,000 i.e. cost being lower than the market value. 7. Interest accrued on opening balance of bonds = 1,200 x 100 x 12% x 3/12 = 3,600 8. __ Interest element in bonds purchased on 02.05.20X1 = 2,000 x 100 x 12% x 4/12 = % 8,000 Cost of investment (amount in investment column) = (2,000 x 100) ~ 8,000 = & 1,92,000 © The Institute of Chartered Accountants of IndiaINVESTMENT ACCOUNTS. Ee 9. Interest element in bonds sold on 30.09.20X1 = 1,500 x 100 x 12% x 3/12 = 7 4,500 10. Interest accrued on closing balance of bonds = 1,700 x 100 x 12% x 3/12 = 5,100 11. Right shares No. of right shares issued = (5,000 + 2,000) x 1/7 = 1,000 shares No. of right shares sold = 1,000 x 20% = 200 shares Proceeds from sale of right shares = 200 x 60 = 7 12,000 to be credited to statement of profit and loss 1,000 - 200 = 800 shares 800 x 250 = € 2,00,000 lend = (5,000 + 2,000 + 800 - 3,000) x 10 x 10% = % 4,800 No. of right shares subscribed Amount of right shares subscribed 12. Note: The amount of dividend for the period, for which shares were not held by the investor, has been treated as capital receipt. Illustration 11 Mr. Brown has made following transactions during the financial year 20X1-X2: Date Particulars 01.05.20X1 Purchased 24,000 12% Bonds of # 100 each at 84 cum-interest. Interest is payable on 30th September and 37st March every year. 15.06.20X1 Purchased 1,50,000 equity shares of * 10 each in Alpha Limited for #25 each through a broker, who charged brokerage @ 2%. 10.07.20X1 Purchased 60,000 equity shares of # 10 each in Beeta Limited for 744 each through a broker, who charged brokerage @2%. 14,10.20X1 Alpha Limited made a bonus issue of two shares for every three shares held. 31.10.20X1 Sold 80,000 shares in Alpha Limited for #22 each. 01.01.20X2 Received 15% interim dividend on equity shares of Alpha Limited. © The Institute of Chartered Accountants of India15.01.20X2 Beta Limited made a right issue of one equity share for every four shares held at #5 per share. Mr. Brown exercised his option for 40% of his entitlements and sold the balance rights in the market at #2.25 per share. 01.03.20X2 Sold 15,000 12% Bonds at 7.90 ex-interest. 15,03.20X2 Received 18% interim dividend on equity shares of Beeta Limited. Interest on 12% Bonds was duly received on due dates. Prepare separate investment account for 12% Bonds, Equity Shares of Alpha Limited and Equity Shares of Beeta Limited in the books of Mr. Brown for the year ended on 31st March, 20x2, Solution In the books of Mr. Brown 12% Bonds for the year ended 31% March, 20X2 20x1 |ToBankafe | 24000] 24000] 1982000] 20x1 |8y Bank-inerest | 144000] May, | (wN7) sept 30 | "(24000 100 12x62) 202 |ToP ALAC : -| 1005000} 20x2 | Bank +5000] 75,000] 13,50.000| March) (WN) Mar. | A/c OWN) 20x2 |ToPALAe 1) 249000 20x2. |8y Bank-interest ‘54000 March Mae.31 | (000% 100x EY 12% x6/12) By Balance cid (WN2) 3000 -| 747.000 [z4000| 2,73:000] 2097,000| ‘24000) 2.73000] 20.97,000| © The Institute of Chartered Accountants of IndiaINVESTMENT ACCOUNTS. 2 low 31 IMar. 31 lToP&LA‘e wna) [ToP &LAle 536000|March By Balance | 1,70.000 -| 2601.00] 1 id wna 235,00] 250000] 2,55000|_4361,000| 250000] 2,55,000| 43,61,000) Investment in Equity shares of Beeta Ltd. for the year ended 31° March, 20X2 l20x1 fro ank arc. | 60,009 ~| 26s2800/20x2 [ay Bank | 1.183800) July 10]60,000 x 44) March 15 levidend I ta%x (60,000 + 6.000) 60.000 44) bx 10 18%) lzox2 frosank are | 6009 -| —30.000}march 31 |By Balance fa lon.15] (W.N.5) (bal. fig) |66,000 -| 27.22,800| March fropatare | -| 1.184 5 lan 65000] _ 1,18.600| 27.22.00 66,000] 1,18.800) 27.22.00] Working Notes: 1. Profit on sale of 12% Bond Sales price Less: Cost of bond sold = Profit on sale 2. Closing balance as on 31.3.20X2 of 12 % Bond 3. Profit on sale of equity shares of Alpha Ltd. Sales price % 13,50,000 19,92,000 y 45,900 © 12,45,000) 105,000 7,47,000 % 17,60,000 © The Institute of Chartered Accountants of IndiaLess: Cost of bond sold = Se x 80,000 € 12,24,000) Profit on sale £5,36,000 4. Closing balance as on 31.3.20X2 of equity shares of Alpha Ltd. 38,25,000 50,000 * 170.000 = 26,01,000 5. Calculation of right shares subscribed by Beeta Ltd. 60,000 shares Right Shares = ‘ight Shares ai x1s '5,000 shares Shares subscribed by Mr. Brown = '5,000 x 40%= 6,000 shares Value of right shares subscribed = 6,000 shares @ & 5 per share = 30,000 6. Calculation of sale of right entitlement by Beeta Ltd. No. of right shares sold = 15,000 - 6,000 = 9,000 shares Sale value of right = 9,000 shares x & 2.25 per share = % 20,250 Note: As per para 13 of AS 13, sale proceeds of rights is to be credited to P & L A/c. Purchase of bonds on 01.05.20X1 Interest element in purchase of bonds = 24,000 x 100 x 12% x 1/12 = % 24,000 Investment element in purchase of bonds = (24,000 x 84) ~ 24,000 = % 19,92,000 8. Sale of bonds on 01.03.20x2 Interest element in purchase of bonds = 15,000 x 100 x 12% x 5/12 = & 75,000 Investment element in purchase of bonds = 15,000 x 90 = @ 13,50,000 G5. RECLASSIFICATION OF INVESTMENTS When Investments are classified from Current Investments to Long-term Investments, transfer is made at Cost and Fair Value, whichever is less (at the date of transfer). When Investments are classified from Long-term Investments to Current Investments, transfer is made at Cost and Carrying Amount, whichever is less (at the date of transfer). © The Institute of Chartered Accountants of IndiaReclasification of Investments -——, Current to Long-term Long-term to Current Transfer at Lower of | | Transfer at lower of cost & cost & fair value at the| | carrying amount at the date of transfer date of transfer * Investment Accounting is done as per Accounting Standard-13. + Two types of Investments: ¥ Current Investments ~ readily realisable and intended to be held for not more than one year from the date on which investment is made Y Long-term Investments- other than current investments + Valuation of Current investment — Lower of Cost or Fair Value * Valuation of Long-term investment ~ At cost less ‘other than temporary’ decline + Reclassificatio ¥ From Current to Long-term —> Valuation at Cost and Fair value, whichever is lower ¥ — From Long-term to Current -> Valuation at Cost and Carrying Amount, whichever is lower * Disposal of investment: Y Difference between carrying amount and disposal proceeds is transferred to Profit & Loss A/c. In case of partial sale, use weighted average method. © The Institute of Chartered Accountants of IndiaTEST YOUR KNOWLEDGE mca Choose the most appropriate option as the answer: 1. The cost of Right shares is (2) added to the cost of investments, (b) subtracted from the cost of investments. (© no treatment is required. Long term investments are carried at (@ fair value. (b) cost less ‘other than temporary’ decline. (© Cost and market value whichever is less. Current investments are carried at (2) Fair value. (b) cost. (Q. Cost and fair value, whichever is less. A.Ltd. acquired 2,000 equity shares of Omega Ltd. on cum-right basis at % 75 per share. Subsequently, omega Ltd. made a right issue of 1:1 at = 60 per share, which was subscribed for by A. Total cost of investments at the year- end will be & (@) 2,70,000. © The Institute of Chartered Accountants of IndiaINVESTMENT ACCOUNTS. a (b) 1,50,000. (© 1.20000. 5. Cost of investment includes (a) Purchase costs. (b) Brokerage and Stamp duty paid. (©) Both (a) and (b). 6. Accurrent investment is an investment. (2) Thats readily realisable. (b) That is intended to be held for not more than one year from the date on which such investment is made. (© Both (a) and (b) 7. All the following are fixed income bearing securities except (@) Debentures. (b) Equity shares. (© Govt. Bonds. 8 Ifthereis ‘other than temporary’ decline in the value of a long term investment then (@) Carrying amount is reduced to recognise the decline, (b) The reduction in carrying amount is charged to profit and loss account. (©) Both (a) and (b). 9. Ifinvestment is acquired by issue of shares, the acquisition cost of investment is (a) Amount paid for acquisition. (b) Fair value of securities issued. (©). Market price of securities. 10. When long-term investments are reclassified as current investments, current investments are valued at (a) Cost. () Carrying amount. (©) Lower of Cost and Carrying amount. © The Institute of Chartered Accountants of India11. Violet Ltd. held shares in Omega Co. from 01.04.20X1 onwards as investment for long term purpose. Now it wants to reclassify investment of cost of % 50,000 out of these shares as current investments having carrying value of % 45000. The fair value on date of transfer is % 48,000. These reclassified shares would be valued on date of transfer at (a) = 50000 (b) 7.48000 (9% 45000. 12. Mr. X acquires 200 shares of a company on cum-right basis for % 60,000. He subsequently receives an offer of right to acquire fresh shares in the company in the proportion of 1:1 at % 105 each. He does not subscribe but sells the rights for & 5,000. The market value of the shares after their becoming ex-rights has also gone down. It would be appropriate to (a) Credit @ 5,000 to Profit and Loss account. (b) Reduce the carrying amount of investment by & 5,000. (©) Add % 5,000 to the carrying amount of investment. Theoretical Questions 1. Howwill you classify the investments as per AS 13? Explain in Brief. 2. Whether the accounting treatment ‘at cost’ under the head ‘Long Term Investments’ without providing for any diminution in value is correct and in accordance with the provisions of AS 13. If not, what should have been the accounting treatment in such a situation? Explain in brief Practical Questions Question 1 Mr. X acquires 200 shares of a company on cum-right basis for € 70,000. He subsequently receives an offer of right to acquire fresh shares in the company in the proportion of 1:1 at = 107 each. He does not subscribe but sells all the rights for € 12,000. The market value of the shares after their becoming ex-rights has also gone down to % 60,000. What should be the accounting treatment in this case? Question 2 On 1* April, 20X1, XY Ltd. has 15,000 equity shares of ABC Ltd. at a book value of & 15 per share (nominal value & 10 per share). On 1* June, 20X1, XY Ltd. acquired 5,000 © The Institute of Chartered Accountants of IndiaINVESTMENT ACCOUNTS. a equity shares of ABC Ltd. for € 7,00,000. ABC Ltd. announced a bonus and right issue. (1) Bonus was declared, at the rate of one equity share for every five shares held, on 1 July 20X1. (2) _ Right shares are to be issued to the existing shareholders on 1" September 20X1. The company will issue one right share for every 6 shares at 20% premium. No dividend was payable on these shares. (3) Dividend for the year ended 31.3.20X1 were declared by ABC Ltd. @ 20%, which was received by XY Ltd. on 31" October 20X1 XY Ltd. () Took up half the right issue. (i) Sold the remaining rights for & 8 per share. (ii) Sold half of its shareholdings on 1* January 20X2 at 16.50 per share. Brokerage being 1%. You are required to prepare Investment account of XY Ltd. for the year ended 31® March 20X2 assuming the shares are being valued at average cost. Question 3 The following information is presented by Mr. Z (a stock broker), relating to his holding in 9% Central Government Bonds. Opening balance (nominal value) & 1,20,000, Cost & 1,18,000 (Nominal value of each unit is ® 100). 1.3.20X1 Purchased 200 units, ex-interest at ® 98. 1.7.20X1 Sold 500 units, ex-interest out of original holding at % 100. 1.10.20x1 Purchased 150 units at € 98, cum interest. 1.11.20X1 Sold 300 units, ex-interest at & 99 out of original holdings. Interest dates are 30 September and 31" March. Mr. Z closes his books every 31% December. Show the investment account as it would appear in his books. Mr. Z follows FIFO method, Question 4 Mr. Purohit furnishes the following details relating to his holding in 8% Debentures (100 each) of P Ltd,, held as Current assets: 1.4.20X1 Opening balance ~ Nominal value #1,20,000, Cost #1,18,000 1.7.20X1 100 Debentures purchased ex-interest at 798 © The Institute of Chartered Accountants of India1.10.20x1 Sold 200 Debentures ex-interest at 7100 1.1.20x2 Purchased 50 Debentures at #98 ex-interest 1.2.20x2 Sold 200 Debentures ex-interest at #99 Due dates of interest are 30" September and 31 March. Mr. Purohit closes his books on 31.3.20X2. Brokerage at 19% is to be paid for each transaction (at ex-interest price). Show Investment account as it would appear in his books. Assume FIFO method, Market value of 8% Debentures of P Limited on 31.320X2 is 799. Question 5 On 1* April, 20X1, Mr. Vijay had 30,000 Equity shares in X Ltd. at a book value of % 4,50,000 (Face Value % 10 per share). On 22"° June, 20X1, he purchased another 5000 shares of the same company for € 80,000. The Directors of X Ltd, announced a bonus of equity shares in the ratio of one share for seven shares held on 10th August, 20X1 On 31st August, 20X1 the Company made a right issue in the ratio of three shares for every eight shares held, on payment of @ 15 per share. Due date for the payment was 30th September, 20X1, Mr. Vijay subscribed to 2/3rd of the right shares and sold the remaining of his entitlement to Viru for a consideration of ® 2 per share. On 31st October, 20X1, Vijay received dividends from X Ltd. @ 20% for the year ended 31st March, 20X1. Dividend for the shares acquired by him on 22nd June, 20X1 to be adjusted against the cost of purchase. On 15th November, 20X1 Vijay sold 20,000 Equity shares at a premium of € 5 per share. You are required to prepare Investment Account in the books of Mr. Vijay for the year ended 31st March, 20X2 assuming the shares are being valued at average cost. ANSWERS/ SOLUTIONS MCQs 1 @ 2 & % © 4 @ & ]} 6 © 7 &) & © 9% () 10 © 1% © 1 () Theoretical Questions 1. The investments are classified into two categories as per AS 13, viz, Current Investments and Long-term Investments. A current Investment is an investment that is by its nature readily realisable and is intended to be held for not more © The Institute of Chartered Accountants of IndiaINVESTMENT ACCOUNTS. Ee than one year from the date on which such investment is made. The carrying amount for current investments is the lower of cost and fair value. Any reduction to fair value and any reversals of such reductions are included in the statement of profit and loss. A long-term investment is an investment other than a current investment. Long term investments are usually carried at cost. However, when there is a decline, other than temporary, in the value of a long term investment, the carrying amount is reduced to recognise the decline. The reduction in carrying amount is charged to the statement of profit and loss. 2. The accounting treatment ‘at cost’ under the head ‘Long Term Investment’ in the financial statements of the company without providing for any diminution in value is correct and is in accordance with the provisions of AS 13 provided that there is no decline, other than temporary, in the value of investment. If the decline in the value of investment is, other than temporary, compared to the time when the shares were purchased, provision is required to be made. Practical Questions Answer 1 As per AS 13, where the investments are acquired on cum-right basis and the market value of investments immediately after their becoming ex-right is lower than the cost for which they were acquired, it may be appropriate to apply the sale proceeds of rights to reduce the carrying amount of such investments to the market value. In this case, the amount of the ex-right market value of 200 shares bought by X immediately after the declaration of rights falls to %60,000. In this case, out of sale proceeds of % 12,000, % 10,000 may be applied to reduce the carrying amount to bring it to the market value and € 2,000 would be credited to the profit and loss account. Answer 2 In the books of XY Ltd. Investment in equity shares of ABC Ltd. for the year ended 31 March, 20X2 june |ToBankave | 5,000] ~| 1,00.000]20x2 py Bank are | 13,000) | 212355 fon.1 |) cwnay july |To Bonus sue | 4,000 Imarch By Balance cfd | 13,000) -| 1.69,509] WN.1) Bt WN.6) ‘© The Institute of Chartered Accountants of Insept |ToBank Ae | 2,000] -| 24000) WN.2) 20x |Top RLWC 5 423855] Yan | wna) 20x2 lroP&LAC -| 30,000) arch 1 26.000] 30000] 351,855) 26,000] 30,000] 3:1,855| Working Notes: 1 Calculation of no. of bonus shares issued 15,000 shares +5,000 shares. 5 Calculation of right shares subscribed Right Shares = 15:000 shares+ ae +4,000 shares 4.000 - 2,000 shares Bonus Shares = 1= 4,000 shares ,000 shares Shares subscribed by XY Ltd, Value of right shares subscribed = 2,000 shares @ ¥ 12 per share = 24,000 Calculation of sale of right entitlement 16,000 Amount received from sale of rights will be credited to statement of profit and loss. 2,000 shares x ® 8 per share = Calculation of profit on sale of shares Total holding = 15,000 shares original 5,000 shares purchased 4,000 shares bonus 2,000 shares right shares 26,000 shares _ 50% of the holdings were sold ite. 13,000 shares (26,000 x1/2) were sold. © The Institute of Chartered Accountants of IndiaINVESTMENT ACCOUNTS. Wa Cost of total holdings of 26,000 shares (on average basis) = € 2,25,000 + & 1,00,000 + & 24,000- % 10,000 = % 3,39,000 Average cost of 13,000 shares would be = 339.000 43 990 = € 1,69,500 26,000 z Sale proceeds of 13,000 shares (13,000 x 216.50) 2,14,500 Less: 1% Brokerage (2,145) 2,12,355 Less: Cost of 13,000 shares (1,69,500) Profit on sale 42,855 5. Dividend received on investment held as on 1* April, 20X1 = 15,000 shares x % 10 x 20% = % 30,000 will be transferred to Profit and Loss A/c Dividend received on shares purchased on 1* June, 20X1 = 5,000 shares x % 10 x 20% = 710,000 will be adjusted to Investment A/c Note: It is presumed that no dividend is received on bonus shares as bonus shares are declared on 1* July, 20X1 and dividend pertains to the year ended 31.3.20X1. 6. Calculation of closing value of shares (on average basis) as on 31 March, 20X2 3,39,000 26,000 13,000%. = %1,69,500 © The Institute of Chartered Accountants of IndiaAnswer 3 In the Books of Mr. Z 9% Central Government Bonds (Investment) Account b/d | 1,20,000] 2.700] 1.18.000]31_ |ew.N3) | 6300 | wna) March To Bank AJc! july 7 [By Bank A/c fl WN2) | 20000] 750) 19,600] |wn4) 50,000] 1,125) 50,000] July 1 |To PBL A/c! 5 -| _833|sept. Jay Bank A/c WNS) 30 [owe -| 4050 + JOct. 1 |To Bank A/c} 'Nov. [By Bank A/c (150x98)) 15,000) | 147001 Jw.) 30,000] 225| 29,700) Nov. 1|To P&L A/c 5 -|200\Dec. By Balance} wna) 31 [e/a (WN. 5} 75,000) 1,688) 73,633] W.N.10) Dec. [To PAL A/c 31 |b) 9.936] Cranstes) 4,55,000| 13,388] 1,53,333) 155,000] 13,386] _1,53,333] Working Note: 1. Interest element in opening balance of bonds = 1,20,000 x 9% x 3/12 = & 2,700 2. Purchase of bonds on 1. 3.20X1 Interest element in purchase of bonds = 200 x 100 x 9% x 5/12 = % 750 Investment element in purchase of bonds = 200 x 98 = & 19,600 3. Interest for half-year ended 31 March = 1,400 x 100 x 9% x 6/12 = % 6300 4. Sale of bonds on 1.7.20X1 Interest element = 500 x 100 x 9% x 3/12 = € 1,125 Investment element = 500 x 100 = € 50,000 © The Institute of Chartered Accountants of IndiaINVESTMENT ACCOUNTS Ea 5. _ Profit on sale of bonds on 1.7.20X1 Cost of bonds = (1,18,000/ 1,200) x 500 = % 49,167 Sale proceeds = % 50,000 Profit element = @ 833 6. _ Interest for half-year ended 30 September = 900 x 100 x 9% x 6/12 = % 4,050 7. Sale of bonds on 1.11.20X1 Interest element = 300 x 100 x 9% x 1/12 = & 225 Investment element = 300 x 99 = & 29,700 8. Profit on sale of bonds on 1.11.20X1 Cost of bonds = (1,18,000/ 1,200) x 300 = & 29,500 Sale proceeds = % 29,700 Profit element = % 200 9. Closing value of investment Bonds in hand remained in hand at 31* December 20X1 From original holding 40,000 | 118,000 , 49999] 39.333 (1,20,000 - 50,000 - 30,000) = iTeanteey) Purchased on 1st March 20,000 19,600 Purchased on 1* October 15,000 14,700 75,000 73,633 10. Interest element in closing balance of bonds = 750 x 100 x 9% x 3/12 = = 1,688 © The Institute of Chartered Accountants of IndiaAnswer 4 Investment A/c of Mr. Purohit for the year ending on 31-3-20X2 (Scrip: 8% Debentures of P Limited) (Interest Payable on 30" September and 31 March) [s09.20x1 10000 9889] .1020x1 20000] | 19800] 133)12202 20000] 533) 19.602 5000] 100] 4949/1220x2 ofl f313.20%2 | 3e0f | lar3.20%2 95,000 | 935t4| 135000) _ 9533] 1.32960] Working Notes: 1. Purchase of debentures on 1.7.20X1 Interest element = 100 x 100 x 8% x 3/12 = & 200 Investment element = (100 x 98) + [1% (100 x 98)] = % 9,898 Purchase of debentures on 1.1.20X2 Interest element = 50 x 100 x 8% x 3/12 = 7 100 Investment element = {(50 x 98) + [16(50 x 98)]} = ¥ 4,949 Valuation of closing balance as on 31.3.20X2: Market value of 950 Debentures at % 99 = € 94,050 Cost of 800 Debentures cost =(Rem x20] = 78,667 100 Debentures cost = 9,898 50 Debentures cost 4.949 B14 Value at the end = © 93,514, ie, whichever is less © The Institute of Chartered Accountants of IndiaINVESTMENT ACCOUNTS Ee 4. Profit on sale of debentures as on 1.10.20X1 Sales price of debentures (200 x 7 100) 20,000 Less: Brokerage @ 1% (200) 19,800 Less: Cost of Debenti 1.18,000 ,. ) ess: Cost of Debentures (13000 20,000 (19,667) Profit on sale 133 5. _ Loss on sale of debentures as on 1.2.20X2 Sales price of debentures (200 x € 99) 19,800 Less: Brokerage @ 1% (198) 19,602 Less: Cost of Debentures (75pove 120,000) (19,666) Loss on sale 64 Interest element in sale of investment = 200 x 100 x 8% x 4/12 7533 Answer 5 Investment Account in Books of Vijay (Scrip: Equity Shares in X Ltd.) 1.420X1 _ |To Bal b/d 30,000] 4,50,000|31.10.20x1 |ay Bank} = —| 10,000] (dividend 22.620X1 |ToBank | 5,000| 80,000) Jon shares) lacquired on 122.6.20x1) 10.8.20X1_ |To Bonus 5,000 -| 30.9.20x1 |ToBank | 10,000} 1,50,000 (Rights Shares) 15.11.20X1 |To P&L A/c| 32,000/15.11.20x1 |By Bank —_| 20,000] 3,00,000} (Profit © The Institute of Chartered Accountants of Indiajon sale of| sale off shares) Ishares) —_]31.3.20x2__ By Bal. c/d | 30,000] 4,02,000| 50,009] 7.12,000| 50,000] 7,12,000 Working Notes: a) @) a” (8) Bonus Shares = (30,000 + 5,000) / 7 = 5,000 shares 100 Right Shares = ) <3 = 15,000 shares Rights shares sold = 15,000x1/3 = 5,000 shares Dividend received = 30,000x10x20% = % 60,000 will be taken to P&L statement Dividend on shares purchased on 22.6.20X1= 5,000%10x20% = & 10,000 is adjusted to Investment A/c Profit on sale of 20,000 shares = Sales proceeds ~ Average cost Sales proceeds = & 3,00,000 (4,50,000 + 80,000 + 1,50,000- 10,000) 50,000 Profit = % 3,00,000- & 2,68,000= % 32,000. Cost of shares on 31.3.20X2 Average cost = 20,000 = & 2,68,000 (4,50, 000 + 80,000 + 1,50,000 - 10,000) 50,000 Sale of rights amounting % 10,000 (¥ 2 x 5,000 shares) will not be shown in investment A/c but will directly be taken to P & L statement. 30,000 = % 4,02,000 © The Institute of Chartered Accountants of IndiaCHAPTER 1Q INSURANCE CLAIMS FOR LOSS OF STOCK AND LOSS OF PROFIT reLoss due to fire, cn Ce Significan ete utes tay Amount of claim for loss of stock in case of Partial Loss (Goods partially Total Loss (Goods fully destroyed) destroyed) . Actual loss (subject to goods being Actual ided the goods are full insured) (Provided the goods are fully | | «iy insured and whether average clause is applicable or not) (Reduction in turnover, and Insurance for Loss of Profit profit. Gi) Increase in the cost of © The Institute of Chartered Accountants of IndiaINSURANCE CLAIMS FOR LOSS OF STOCK AND LOSS. es Claim for Loss of | The Loss of Profit Policy normally covers the following items: Profit (1) Loss of net profit, and (2) Any increased cost of working Gross Profit Net profit + Insured Standing charges oR Insured Standing charges — [Net Trading Loss (If any) X Insured Standing charges/All standing charges of business] Net Profit The net trading profit (exclusive of all capital receipts and accretion and all outlay properly chargeable to capital) resulting from the business of the Insured at the premises after due provision has been made for all standing and other charges including depreciation. Insurable Interest on Debentures, Mortgage Loans and Bank Overdrafts, Standing Rent, Rates and Taxes (other than taxes which form part of net Charges profit) Salaries of Permanent Staff and Wages to Skilled Employees, Boarding and Lodging of resident Directors and/or Manager, Directors’ Fees, Unspecified Standing Charges. Rate of Gross | The rate of Gross Profit earned on turnover during the financial Profit year immediately before the date of damage plus / minus adjustment for current year changes in price level. Annual The turnover during the twelve months immediately preceding Turnover to the date of damage. Standard The turnover of the period in corresponding previous year from Turnover the year in which damage occurred, that corresponds with the Indemnity Period. Indemnity The period beginning with the occurrence of the damage and Period ending not later than twelve months. Thus, itis a period during which business is disturbed due to fire and it is not greater than 12 months. Adjusted Annual | Annual Turnover adjusted with (+/-) Trend Turnover Actual Turnover | Turnover during dislocation / indemnity period © The Institute of Chartered Accountants of IndiaAdjusted Standard Turnover (+/-) Trend (if any) which would be sales in Standard the indemnity period had there been no fire. Turnover Fire Fighting | Expenses incurred to avoid the damages to the business due to Expenses fire. For Example: Fire Brigade Expenses / Water Tankers’ Charges Trend It is an indication of Sales pattern of an organization over a specific time period. It will help in estimation of future expected sales. G 1. INTRODUCTION Business enterprises get insured against the loss of stock on the happening of certain events such as fire, flood, theft, earthquake etc. Insurance being a contract of indemnity, the claim for loss is restricted to the actual loss of assets. Sometimes an enterprise also gets itself insured against consequential loss of profit due to decreased turnover, increased expenses etc. If loss consequential to the loss of stock is also insured, the policy is known as loss of profit or consequential loss policy. Insurance claim can be studied under two parts as under: > — Claim for loss of stock > — Claim for loss of profit (G2. MEANING OF FIRE For purposes of insurance, fire means: 1. Fire (whether resulting from explosion or otherwise) not occasioned or happening through: (2) Its own spontaneous fomentation or heating or its undergoing any process involving the application of heat; (b) Earthquake, subterraneous fire, riot, civil commotion, war, invasion act of foreign enemy, hostilities (whether war be declared or not), civil war, rebellion, revolution, insurrection, military or usurped power. ‘© The Institute of Chartered Accountants of InINSURANCE CLAIMS FOR LOSS OF STOCK AND LOSS. . os 2. Lightning. 3. Explosion, not occasioned or happening through any of the perils specified in 1 (a) above. (i) of boilers used for domestic purposes only; (ii) of any other boilers or economizers on the premises; (iii) in a building not being any part of any gas works or gas for domestic purposes or used for lighting or heating the building. The policy of insurance can be made to cover any of the excepted perils by agreement and payment of extra premium, if any. Damage may also be covered if caused by storm or tempest, flood, escape of water, impact and breakdown of machinery, etc., again by agreement with the insurer. Usually, fire policies covering stock or other assets do not cover explosion of boilers used for domestic purposes or other boilers or economizers in the premises but policies in respect of profit cover such explosions. G 3. CLAIM FOR LOSS OF STOCK Fire insurance being a contract of indemnity, a claim can be lodged only for the actual amount of the loss, not exceeding the insured value. In dealing with problems requiring determination of the claim the following point must be noted: (a) Total Loss: If the goods are totally destroyed, the amount of claim is equal to the actual loss, provided the goods are fully insured. However, in case of under insurance (ie. insurable value of stock insured is more than the sum insured),the amount of claim is restricted to the policy amount. Example: Stock on the date of fire *3,00,000 Stock fully destroyed by fire (no salvage) Amount of policy in case (1) #4,00,000 and in case (2) #2,50,000. Here, in case (1), claim can be lodged for actual amount of loss ie. % 3,00,000, as it is not exceeding the policy value, But in case (2), ie. claim amount cannot exceed policy amount and it will be for #2,50,000. (b) Partial Loss: If the goods are partially destroyed, the amount of claim is equal to the actual loss provided the goods are fully insured. However, in case of © The Institute of Chartered Accountants of Indiaunder insurance, the amount of claim will depend upon the nature of insurance policy as follows: @ (ii) out Average clause: Claim is equal to the lower of actual loss or the sum insured, Example: Stock on the date of fire 7 3,00,000 Goods saved from fire (ie. salvage) %1,20,000 Compute the amount of claim if amount of policy (without average clause) is Case (1) %1,00,000 Case (2) #2,00,000 Solution Stock on the date of fire % 3,00,000 Less: Salvage (%1,20,000 Loss of Stock = 180,000 Amount of claim is as under: Case (1) © 1,00,000 (restricted to amount of policy, although loss is of 1,80,000 only) Case (2) % 1,80,000 (restricted to amount of loss) With Average Clause: Amount of claim for loss of stock is proportionately reduced, considering the ratio of policy amount (ie. insured amount) to the value of stock as on the date of fire (i.e, insurable amount) as shown below: [ Amount of claim = Loss of stock x sum insured / Insurable amount (Total Cost) One should note that the average clause applies only where the insured value is less than the total cost and not when goods are fully insured. Example (Logic of Average Clause) Stock on the date of fire 60,000 Amount of policy for loss of stock 15,000 Salvage Value (residual value) #50,000 © The Institute of Chartered Accountants of IndiaINSURANCE CLAIMS FOR LOSS OF STOCK AND LOSS. WI, Loss of stock 10,000 Find out claim which should be paid by an insurance company. Solution Usually, students think that loss of £10,000 is lower than amount of policy of 315,000. So full loss is recoverable by insurance claim. But in reality, as only 25% of the stock was insured (215,000/%60,000X100) and remaining 75% is uninsured. Hence, claim should be restricted to 25% of the loss of % 10,000 i.e. % 2,500 only. SUMMARY CHART 3.1. Relevant points (i) Where the stock records are maintained and such records are not destroyed by fire, the value of the stock as at the date of the fire can be easily arrived at. (ii) Where either the stock records are not available or where they are destroyed by the fire, the value of stock at the date of the fire has to be estimated. The usual method of arriving at this value is to build up a Trading Account as from the date of last accounting year. After allowing for the usual gross profit, the figure of closing stock on the date of the fire can be ascertained as the balancing item. © The Institute of Chartered Accountants of India(iii) Where books of account are destroyed, the task of building up the Trading Account becomes difficult. In that case information is obtained from the customers and suppliers have to be circularised to ascertain the amount of sales and purchases. (iv) After the insurance company makes payment for total loss, it has the same rights which the insured had over the damaged stock. These are subrogated" to the insurance company. In practice, in determining the amount of the claim, credit is given for damaged and salvaged stock. (V)_ Frequently salvaged stock can be made saleable after it is reconditioned. In that case, the cost of such stock must be credited to the Trading Account and debited to a salvaged stock account. The expenses on reconditioning must be debited and the sales credited to this account, the final balance being transferred to the Profit & Loss Account. Value of salvaged stock 900 ‘Add: | Expenses on re-conditioning 00 Less: | Sales 200 Profit/ (loss) XXX Hlustration 1 From the following information, ascertain the value of stock as on 31% March, 20X2: Stock as on 01-04-20X1 28,500 Purchases 1,52,500 Manufacturing Expenses 30,000 " Subrogation is the right of an insurer to legally pursue a third party that caused an insurance loss to the insured, ie, the right to sue the third party for the loss suffered by the insured. © The Institute of Chartered Accountants of IndiaINSURANCE CLAIMS FOR LOSS OF STOCK AND LOSS. ee Selling Expenses 12,100 Administration Expenses 6,000 Financial Expenses 4,300 Sales 2,49,000 At the time of valuing stock as on 31st March, 20X1, a sum of €3,500 was written off on a particular item, which was originally purchased for * 10,000 and was sold during the year for 7 9,000. Barring the transaction relating to this item, the gross profit earned during the year was 20% on sales. Solution Statement showing valuation of stock as on 31.3.20X2 Stock as on 01.04.20X1 28,500 Less: Book value of abnormal stock 6,500 & 10,000 -% 3,500) 22,000 Add: Purchases 1,52,500 Manufacturing expenses 30,000 2,04,500 Less: Cost of Sales: Sales 249,000 Less: Sale of abnormal stock {9,000) 2,40,000 Less: Gross profit @ 20% (48,000) | (1,92,000) Value of Stock as on 31% March, 20X2 12,500 Alternative Method (Trading Account Approach) n Profi Ye z Total Sales 2,49,000 Less: Abnormal Sales (9,000) Regular Sales 2.40,000 ‘A. Gross Profit on Regular Sales @ 20% 48,000 B. Gross Profit on Abnormal Sales [9,000 ~ 6,500*] 2,500 Total Gross Profit (A+B) 50,500 * Written down cost (Original Cost 10,000 less write off for 3,500) © The Institute of Chartered Accountants of IndiaComputation of Closing Stock as on 31% March, 20X2 Opening Stock 28,500 ‘Add: Purchases 1,52,500 Add: Manufacturing Expenses 30,000 Add: Gross Profit (as computed above) 50,500 2,61,500 Less: Total Sales (2.49,000) Value of Stock as on 31% March, 20x2 —12,500 lustration 2 Mr. A prepares accounts on 30" September each year, but on 31 December, 20X1 fire destroyed the greater part of his stock. Following information was collected from his book: Stock as on 1.10.20X1 29,700 Purchases from 1.10.20X1 to 31.12.20X1 75,000 Wages from 1.10.20X1 to 31.12.20X1 33,000 Sales from 1.10.20X1 to 31.12.20X1 1,40,000 The rate of gross profit is 33.33% on cost. Stock to the value of #3,000 was salvaged. Insurance policy was for # 25,000 and claim was subject to average clause. Additional information: (Stock at the beginning was calculated at 10% less than cost. (i) A plant was installed by firm's own worker. He was paid #500, which was included in wages. (iti) Purchases include the purchase of the plant for * 5,000 You are required to calculate the claim for the loss of stock. Solution Computation of claim for loss of stock: Stock on the date of fire i.e. 31.12.20X1 (Refer working note) 30,500 Less: Salvaged stock (3,000) Loss of stock 27,500 © The Institute of Chartered Accountants of IndiaINSURANCE CLAIMS FOR LOSS OF STOCK AND LOSS... Amount of claim: : Insured value _____toss of stock Total cost of stock on the date of fire 27500 X 25000/30500 = % 22,541 Working Note: Memorandum trading account can be prepared for the period from 1.10.20X1 to 31.12.20X1 to compute the value of stock on 31.12.20X1 Memorandum Trading Account for period from 1.10.20X1 to 31.12.20X1 To Opening stock 33,000 | By Sales 1,40,000 (© 29,700 x 100/90) By Closing stock | 30,500 (bal. fig.) To Purchases 75,000 Less: Cost of plant (5,000) | 70,000 To Wages 33,000 Less: Wages paid for plant | (500)| 32,500 To Gross profit 35,000 (83.33% on cost or 25% on sales) 1,70,500 1,70,500 lustration 3 On 20" October, 20X1, the godown and business premises of Aman Ltd. were affected by fire. From the salvaged accounting records, the following information is available: Stock of goods @ 10% lower than cost as on 31* March, 20X1 2,16,000 Purchases less returns (1.4.20X1 to 20.10.20X1) 2,80,000 Sales less returns (1.4.20X1 to 20.10.20X1) 6,20,000 © The Institute of Chartered Accountants of IndiaAdditional information: (1) Sales upto 20” October, 20X1 includes * 80,000 for which goods had not been dispatched. (2) Purchases upto 20” October, 20X1 did not include # 40,000 for which purchase invoices had not been received from suppliers, though goods have been received in Godown. (3) Past records show the gross profit rate of 25%. (4) The value of goods salvaged from fire # 31,000. (5) Aman Ltd. has insured their stock for # 1,00,000 Compute the amount of claim to be lodged to the insurance company. Solution Memorandum Trading A/c (1.4.20X1 to 20.10.20X1) To Opening stock (at cost, | 2,40,000 | By Sales 540,000 2,16,000 / 0.90) (@ 6,20,000 — z 80,000) To Purchases 3,20,000 | By Closing stock 1,585,000 (& 2,80,000 + € 40,000) (bal. fig.) To Gross profit (© 540,000 x 25%") 1,35,000 6,95,000 695,000 * Itis assumed that gross profit is provided as a percentage of sales Stock on the date of fire (i.e. on 20.10.20X1) 1,55,000 Less: Stock salvaged (31,000) Stock destroyed by fire 124,000 Insurance claim = Loss of Stock X Insured Value / Total Cost of Stock = %1,24,000 X 1,00,000 / 1,55,000 = %80,000 © The Institute of Chartered Accountants of India