These account record
particulars of money invested in any of the various types of securities ‘A
separate ledger account should be opened for each investment and it advisable
that it should be in columnar form so as show clearly
particulars of money invested in any of the various types of securities ‘A
separate ledger account should be opened for each investment and it advisable
that it should be in columnar form so as show clearly
1. The nominal amount of the stock, shares or interest; and
2. The income received, that is, dividends or interest; and
3. The accrual cash paid representing the capital invested
When the securities are
purchased the investment Account is debited with the total cost, but as it
frequently happens that the securities are purchased “ cum div.” that is
including the accrued portion of the pending dividend or interest, the purchase
price must be apportioned between capital and revenue.
purchased the investment Account is debited with the total cost, but as it
frequently happens that the securities are purchased “ cum div.” that is
including the accrued portion of the pending dividend or interest, the purchase
price must be apportioned between capital and revenue.
The principle governing the
preparation of Investment Accounts is to
seek to credit to Profit and Loss Account income attributable to the period for
which dividend payments are received. This principle does not apply, however,
in the case of Executorships and Trust Accounts.
preparation of Investment Accounts is to
seek to credit to Profit and Loss Account income attributable to the period for
which dividend payments are received. This principle does not apply, however,
in the case of Executorships and Trust Accounts.
For example N2,000
percent Government stock, on
which interest is payable on June 1st
and December 1st , is purchased on April 1st at 78 cum div. Brokerage and stamps amount to
N2.75, so that the total cost is N1,562.75, and accordingly N1,539.42 is placed to the debit of
capital andN1,562.75. A full half – year’s
interest (N35) is received on 1st June, but only two months interest can be
correctly appropriated as revenue.
which interest is payable on June 1st
and December 1st , is purchased on April 1st at 78 cum div. Brokerage and stamps amount to
capital and
interest (
correctly appropriated as revenue.
Therefore, to adjust the
transaction between capital and revenue, it is assumed that four – sixths of
the six months interest, that isN23.33,
is included in the purchase price,N1,562.75,
and accordinglyN1,539.42 is placed to
the debit of capital andN23.33 to the
debit of revenue. The whole interest when received will be credited to the
income column, and the investment Account will thus include two month’s
interest only as the net income for the half year. WhenN1,000 Government stock is sold on 30th September, at
cum. Div., the net proceed must be apportioned as four month’s interest
is included in revenue and the balance of the proceeds to capital. The
investment account is as follows:
transaction between capital and revenue, it is assumed that four – sixths of
the six months interest, that is
is included in the purchase price,
and accordingly
the debit of capital and
debit of revenue. The whole interest when received will be credited to the
income column, and the investment Account will thus include two month’s
interest only as the net income for the half year. When
is included in revenue and the balance of the proceeds to capital. The
investment account is as follows:
% GOVERNMENT STOCK
|
Date
|
particulars
|
|
Normal Amount
|
income
|
capital
|
Date
|
|
|
Normal Amount
|
Income
|
Capital
|
|
1996
April
Dec.31
1997
Jan.1
|
To cash
Broken
& Stamps
2.75
“Profit and Loss Account”
Investment Reserve Profit on sale
Proceeds:
Cost : 769.71
To Balances
|
b/d
|
2,000.00
1,000.000
|
23.33
45.75
2.91
|
1,539.42
62.12
769.71
|
1996
June 1
Sept.
30
Dec.1
31
|
By Cash –Interest
“Cash-
841/2 =
Less Brokerage
Et cetra 1.50
“Cash-interest
“Internal accrued
“Balances …
|
c/d
c/d
|
1,000.000
1,000.000
|
35.00
11.67
17.50
2.91
|
831.83
769.71
|
Notes
(1) Where part of the investment is sold at a profit, it is usual
to transfer the profit on the profit on the portion sold to the credit of
profit and loss Account, or to investment Reserve whilst other investments
continue to be
to transfer the profit on the profit on the portion sold to the credit of
profit and loss Account, or to investment Reserve whilst other investments
continue to be
2. If the interest had been of a fluctuating nature, the fall
purchase price ofN1,562.75 would have
been debited to capital at the time of purchase, and the interest ofN35 received on June 1st credited
the (23.33) to capital, and
this (11.67) to income.
purchase price of
been debited to capital at the time of purchase, and the interest of
3. The interest accrued at December 31st is equivalent to one
month’s interest onN1,000.
month’s interest on
4. The amount of income transferred to Profit and Loss Account,
N43.75 represents interest at
percent on N2,000 for six months and on N1,000
for three months – the nominal amount held for these periods.
for three months – the nominal amount held for these periods.
We should note that brokerage and stamps are a
charge against capital and must be debited to capital account as part of the
purchase price. In similar manner, the brokerage incurred on a sale of the investment
is treated as a capital charge and is deducted from the sale price only the net
proceeds being credited to the capital to the Investment Account.
charge against capital and must be debited to capital account as part of the
purchase price. In similar manner, the brokerage incurred on a sale of the investment
is treated as a capital charge and is deducted from the sale price only the net
proceeds being credited to the capital to the Investment Account.
Where investments are sold cum. div , the income
accrued to date of sale will be credited to income column and the balance of
net proceeds of sale treated as capital, and the difference between the two
capital columns will be the profit or loss on the sale.
accrued to date of sale will be credited to income column and the balance of
net proceeds of sale treated as capital, and the difference between the two
capital columns will be the profit or loss on the sale.
The above method can only be used or sold
“ex.div. the price paid or received will have been reduced by the full
impending dividend, and this dividend, when paid, will go on to seller of the
investments. Consequently, a purchaser compensated for this loss by paying a
price lower, by the amount of the dividend, then he would otherwise have paid.
“ex.div. the price paid or received will have been reduced by the full
impending dividend, and this dividend, when paid, will go on to seller of the
investments. Consequently, a purchaser compensated for this loss by paying a
price lower, by the amount of the dividend, then he would otherwise have paid.
It is necessary, however, to credit income and
debit capital with the amount of applicable to the period between the date of
purchase and the date of the dividend, the rate of dividend, where it is not
fixed, being ascertained by the purchaser for this purpose. On a sale “ex.
div”. the vendor receives a dividend which partly covers a period
subsequent to the date of sale. The proportion of this dividend applicable to
the period between the date of sale and the date of the dividend should
therefore be regarded as capital and credited to the capital column, in augmentation
of proceeds of sale. (“The practice of quoting sticks and shares “ex.div.”.
arises from the necessity of closing share transfer books some weeks before the
payment of a dividend so that the warrants can be drawn in favour of the persons
then on the register.)
debit capital with the amount of applicable to the period between the date of
purchase and the date of the dividend, the rate of dividend, where it is not
fixed, being ascertained by the purchaser for this purpose. On a sale “ex.
div”. the vendor receives a dividend which partly covers a period
subsequent to the date of sale. The proportion of this dividend applicable to
the period between the date of sale and the date of the dividend should
therefore be regarded as capital and credited to the capital column, in augmentation
of proceeds of sale. (“The practice of quoting sticks and shares “ex.div.”.
arises from the necessity of closing share transfer books some weeks before the
payment of a dividend so that the warrants can be drawn in favour of the persons
then on the register.)
EXAMPLE
May, 1995, at ex.div. On 1st May, 1996,
of the stock is sold at 42 ex.div. Required.
Write up the investment Account for
the period to 30th June, and carry down the balances on that date.
Ignore brokerage and expenses. Interests paid on 1st June and 1st December
(ignore income tax).
SOLUTION
MUNICIPAL STOCK
|
Date
|
Particulars
|
|
Normal
|
Income
|
Capital
|
Date
|
|
|
Normal
|
Income
|
Capital
|
|
1995
May 1
June 1
1990
June 30
|
To cash purchase
“Transfer to income
Profit and Loss Account
|
|
2,000.00
|
7584
|
850.00
5.84
|
1995
June 1
Dec.1
1996
May 1
June.1
|
By Transfer From Capital Interest
Accrued To Date
Cash – Interest
“Cash-sale of
|
|
1,000.00
|
5.84
35.00
|
420.00
|
NOTE;
1. One month’s accrued is debited to capital on Jane 1st, 1995,
and credited to icome, in respect of the period from May 1st to June 1st, 1995.
and credited to icome, in respect of the period from May 1st to June 1st, 1995.
2. On June 1st, 1996, one month’s interest in
respect of theN1,000 stock sold must
be credited to capital, since the full interest has been deducted in arriving
at the “ex. div.” price.
respect of the
be credited to capital, since the full interest has been deducted in arriving
at the “ex. div.” price.
3. The loss on sale must be written off.
This is computed: –
Cost of N1, 000
stock = ofN855.84 = N427.92
stock = of
Amount received on sale = N422.92
Loss
on saleN5,00
on sale
4. The stock unsold is carried down at cost.
In the case of Government
securities and certain other first – class fixed interest stocks, it is the
practice at the end of the financial period, for interest accrued and not
received to be credited to the income column of the investment Account, and to
be brought down as a debit entry for the nest period. The balance on the income
columns is transferred to the credit of profit and loss account (or it may be
transferred direct to Profit and Loss Account).
securities and certain other first – class fixed interest stocks, it is the
practice at the end of the financial period, for interest accrued and not
received to be credited to the income column of the investment Account, and to
be brought down as a debit entry for the nest period. The balance on the income
columns is transferred to the credit of profit and loss account (or it may be
transferred direct to Profit and Loss Account).
In the case of stocks and
shares in companies, or debentures where there is any possibility of default in
payment of the interest, the general practice is to take credit only for
dividends and interest actually received, amount accrued not being brought in.
where, however, the forth coming dividend is declared after the end of the accounting
period and before the accounts are completed, so that the amount is known and
there is no doubt as to payment, the amount accrued should be brought in.
shares in companies, or debentures where there is any possibility of default in
payment of the interest, the general practice is to take credit only for
dividends and interest actually received, amount accrued not being brought in.
where, however, the forth coming dividend is declared after the end of the accounting
period and before the accounts are completed, so that the amount is known and
there is no doubt as to payment, the amount accrued should be brought in.
Fluctuations in the market
value of the investment do not normally necessitate any adjustment to the value
at which the investments are shown in the investment Account, the balance of
which is usually carried down at cost.
value of the investment do not normally necessitate any adjustment to the value
at which the investments are shown in the investment Account, the balance of
which is usually carried down at cost.
Where the market value
exceeds book value, the excess represents an unrealized capital profit which
should be ignored. Where the realizable value provision should be made for the
diminution in value, the amount required Profit and Loss Account or Investment
Reserve, if any.
exceeds book value, the excess represents an unrealized capital profit which
should be ignored. Where the realizable value provision should be made for the
diminution in value, the amount required Profit and Loss Account or Investment
Reserve, if any.
Taxation on realized
profits is dealt with separately, and charged, in the case of a limited
company, against profit and in the case of a partnership or sole trader to
drawings.
profits is dealt with separately, and charged, in the case of a limited
company, against profit and in the case of a partnership or sole trader to
drawings.
CUM DIV.
Ex. Div. is when the
purchase price of stock or share exclude interest or dividend before the date
of purchase, we use the term Cum. Div. thus, Cum Div. is equal to Purchase Price
and Interest.
purchase price of stock or share exclude interest or dividend before the date
of purchase, we use the term Cum. Div. thus, Cum Div. is equal to Purchase Price
and Interest.
This is also included in
the ful amount periodical interest of dividend when it is subsequently received,
the effect of this apportionment is to treat the capital portion as a
recoupment of the amount paid for it and as included in the Cum Div. price.
the ful amount periodical interest of dividend when it is subsequently received,
the effect of this apportionment is to treat the capital portion as a
recoupment of the amount paid for it and as included in the Cum Div. price.
The most important
application of Cum Div. in the company account is found in the treatment of
dividends received by a holding company out of pre-acuisition profit of a new
acquired subsidiary company.
application of Cum Div. in the company account is found in the treatment of
dividends received by a holding company out of pre-acuisition profit of a new
acquired subsidiary company.
EX. DIV
Ex. Div. is when the purchase price of stock
or share exclude interest or dividend before the date of purchase. Thus in
arriving at the ex div. price, we have the full amount of the forth coming
purchase less interest and deducted income tax.
or share exclude interest or dividend before the date of purchase. Thus in
arriving at the ex div. price, we have the full amount of the forth coming
purchase less interest and deducted income tax.
Ex.Div = Purchase price –
interest and tax accordingly, the price paid for the stock is short of the
principal value by the amount of the dividend accruing from the date of the
transaction to the dividends date.
interest and tax accordingly, the price paid for the stock is short of the
principal value by the amount of the dividend accruing from the date of the
transaction to the dividends date.
When stocks are bought
Ex.Div. it is permissible to debit the capital column and credit the income
column of the investment account with dividend or interest accrued from the
date of purchase to the next dividend date, and when sold at Ex Div. the
reverse is the case.
Ex.Div. it is permissible to debit the capital column and credit the income
column of the investment account with dividend or interest accrued from the
date of purchase to the next dividend date, and when sold at Ex Div. the
reverse is the case.
