Questions and Answers
What does the term 'Cum-interest Price' refer to?
To compute interest for a debenture purchased, which time frame is crucial?
What does 'Ex-interest Price' indicate?
Which account reflects profit or loss from the sale of debentures?
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Which of the following is a characteristic of fixed return bearing securities?
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If a debenture with a face value of Rs. 100 has an interest rate of 5%, what is the interest for one quarter if purchased three months after the due date?
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What do investments primarily aim to achieve?
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Which factor is NOT typically considered while evaluating investments?
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What components are included in the cost of investment?
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Which type of investment is classified as a current asset?
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What is included in the total cost of investments when calculating the purchase price?
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Which method is prescribed by AS 13 for calculating the weighted average cost of investments?
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How is brokerage treated when selling investments?
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What represents the carrying amount of investments on the balance sheet?
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What is the formula for calculating the weighted average cost of investments?
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What is the correct calculation of interest for the period from 31st December 2019 to 31st March 2020?
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How is the amount of interest for the debentures calculated from 31st March 2019 to 31st December 2020?
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What is the cum-interest price for the 500 debentures sold at Rs. 120 each?
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What must be recorded at the beginning and end of the accounting year according to the key points?
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In the absence of information, how is the assumed price described for recording purposes?
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Study Notes
Investment Accounting under AS 13
- Investments are assets aimed at generating income through dividends, interest, rentals, or capital appreciation.
- The absence of returns indicates a lack of investment effectiveness.
Key Considerations for Investments
- Liquidity: The ease of converting investments into cash.
- Security: Assurance of the investment's safety.
- Profitability: The potential for financial gain.
Types of Investments
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Based on Holding Period:
- Long-term Investments: Non-current assets.
- Short-term Investments: Current assets.
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Based on Nature:
- Fixed Return Bearing Securities: Such as debentures, bonds, and government securities with a constant interest rate.
- Variable Return Bearing Securities: Investments with fluctuating returns.
Fixed Return Bearing Securities
- Earn interest at a predetermined fixed rate.
- Interest is payable on specific dates and based on the nominal value of investments.
Investment Transactions
- Purchase and Sale: Record buying or selling investments.
- Accrued Interest: Track interest earned but not yet received.
- Balance Management: Opening and closing balances are crucial for assessment.
Cost of Investment
- Comprises purchase price and acquisition costs (brokerage, fees, duties).
- Total investment cost is the sum of purchase price and additional charges.
Disposal of Investments
- Involves selling investments and determining profit or loss:
- Calculate gross proceeds minus related sales expenses to find net proceeds.
- Subtract the carrying amount of the investment sold to ascertain profit/loss.
Brokerage Considerations
- Calculated on the quotation price of investments.
- Added to the purchase price and deducted from the sales price.
Carrying Amount of Investments
- Represents the value of investments listed in financial statements.
- Long-term investments are recorded at cost, while current investments are reported at the lower of cost or market value.
Valuation Methods
- FIFO Basis: First in, first out.
- Weighted Average Basis: AS 13 mandates this method for calculating average cost.
- Specific Item Basis: Identifying specific investments for accounting purposes.
Interest Accounting
- Cum-Interest Price: Includes interest within the quotation price.
- Ex-Interest Price: Excludes interest from the quotation price.
- Interest Calculation: Based on the nominal value and the duration from the last due date to the transaction date.
Points to Remember
- Interest is calculated on nominal/face value only.
- Record accrued interest at the beginning and end of the accounting year.
- Ensure journal entries are made for interest received.
- Default to ex-interest price when price details are unclear.
- Only ex-interest prices should be noted in the cost/capital column.
- Transfer remaining interest balance to Profit & Loss Account.
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Description
This quiz covers key concepts in investment accounting as per Accounting Standard 13. It explores types of investments, their classifications based on holding periods and nature, and crucial considerations such as liquidity, security, and profitability. Test your knowledge on fixed and variable return bearing securities.
