CA NITIN GOEL AS 13: ACCOUNTING FOR INVESTMENTS

CH
7
“If People are not Laughing at your Goals, your Goals are too Small.”
-Azim Premji

Investments are assets held by an enterprise for:

 Earning income by way of dividends, interest, and rentals,
 Capital appreciation, or
Meaning  Other benefits
to the investing enterprise.
Note: Assets held as stock-in-trade are not ‘investments’.
This Standard does not deal with:
 Bases for recognition of interest, dividends and rentals earned on
investments which are covered by AS:9 on Revenue Recognition
Non  Operating or finance leases
Applicability  Investments of retirement benefit plans and life insurance enterprises
 mutual funds and venture capital funds and/or the related asset
management companies, banks and public financial institutions

 Some investments have no physical existence and are represented

merely by certificates or similar documents (e.g., shares) while others
exist in a physical form (e.g., buildings).
Forms of
 For some investments, an active market exists from which a market
Investments
value can be established. For such investments, market value generally
provides the best evidence of fair value. For other investments, an active
market does not exist and other means are used to determine fair value.

An investment property is an investment in land or buildings that are not

intended to be occupied substantially for use by, or in the operations of, the
Investment
investing enterprise. An enterprise holding investment properties should
Properties
account for them in accordance with cost model as prescribed in AS 10,

It is the amount for which an asset could be exchanged between a

knowledgeable, willing buyer & a knowledgeable, willing seller in an arm’s
Meaning of
length transaction. Under appropriate circumstances, market value or net
Fair Value
realisable value provides evidence of fair value.

It is the amount obtainable from the sale of an investment in an open

Meaning of
market, net of expenses necessarily to be incurred on or before disposal.
Market Value
Current It is an investment that is by its nature readily realisable and
Investment is intended to be held for not more than one year from the date
Classification
on which such investment is made.
of
Investments
Long Term It is an investment other than a current investment.
Investment

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CA NITIN GOEL AS 13: ACCOUNTING FOR INVESTMENTS

COST OF INVESTMENTS
The cost of an investment includes acquisition charges such as brokerage,
Direct
fees and duties.
Purchase
In exchange Cost of Investment is
for share  Fair Market Value (FMV) of Securities issued or
/Other  Fair Market Value (FMV) of the Investment acquired
Securities whichever is more clearly evident.
When right shares offered are subscribed for, the cost of the right shares
is added to the carrying amount of the original holding. If rights are not
subscribed for but are sold in the market, the sale proceeds are taken to
the profit and loss statement. However, where the investments are acquired
Note
on cum-right basis and the market value of investments immediately after
PARA 13
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.

CARRYING AMOUNT OF INVESTMENTS

Lower of Cost and Fair value.
Lower can be on Individual basis or category wise (i.e. equity shares,
debentures, preference shares etc.) but not on global/overall basis.
However, the more prudent and appropriate method is to carry investments
individually at the lower of cost and fair value.
Current
Investments
Any reduction to fair value is debited to profit and loss account, however, if
fair value of investment is increased subsequently, the increase in value of
current investment up to the cost of investment is credited to the P&L A/c
(and excess portion, if any, is ignored).

Usually Carried at cost.

Valuation determined on Individual investment basis.
Where there is a decline, other than temporary, in the carrying amounts of
long term investments, the resultant reduction in the carrying amount is
charged to the P&L A/c.
Long Term The reduction in carrying amount is reversed when there is a rise in the
Investments value of the investment, or if the reasons for the reduction no longer exist.

Indicators of the value of an investment are obtained by reference to its

market value, the investee's assets and results and the expected cash flows
from the investment.

RECLASSIFICATION OF INVESTMENTS
Reclassified from Long Term to Current Reclassified from Current to Long Term
Transfers are made at the lower of cost and Transfers are made at the lower of cost
carrying amount at the date of transfer and fair value at the date of transfer.
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.

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CA NITIN GOEL AS 13: ACCOUNTING FOR INVESTMENTS

DISCLOSURE REQUIREMENTS
Following disclosures in financial statements in relation to investments are appropriate: -
(i) The accounting policies for the determination of carrying amount of investments.
(ii) The amounts included in profit and loss statement for:
a. Interest, dividends (showing separately dividends from subsidiary companies), and
rentals on investments showing separately such income from long term and current
investments. Gross income should be stated, the amount of income tax deducted at
source being included under Advance Taxes Paid.
b. Profits and losses on disposal of current investments and changes in carrying
amount of such investments.
c. Profits and losses on disposal of long term investments and changes in the carrying
amount of such investments.
(iii) Significant restrictions on the right of ownership, realizability of investments or the
remittance of income and proceeds of disposal.
(iv) The aggregate amount of quoted and unquoted investments, giving the aggregate market
value of quoted investments.
(v) Other disclosures as specifically required by relevant statute governing the enterprise.

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CA NITIN GOEL AS 13: ACCOUNTING FOR INVESTMENTS

Classification of Investments
of Income
On the basis

Interest Income Dividend Income

Securities
Bearing Securities
Bearing
Debentures Bonds
,

Gort-securities
,

Equity Shares,
Preference shares

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CA NITIN GOEL AS 13: ACCOUNTING FOR INVESTMENTS

Interest Income Bearing

Securities
Purchase
1
of Investment &
Receipt of Interest

Investment Alc
-

Dr . Bank All
=

Dr .

&
Interest on Inv -

A/c-Du .
To Interest on Inv.
Date
Calculated
of
Int
Holding
on on
To Bank All

3 sale
of Investment
Profit/loss sale on

Back AlC Dr .
Profit Investment A/c
: -DU
-

To Investment All To P& L A/c

*
To Interest Inv
Alc Loss P&
on .
:
LA/L-Dr .

To Investment
* Calculated Last Interest date till Transaction date
from
Notes :

Interest is calculated Face value

1
always on

.
2 Transaction Can be En. Interest or Cum-Interest

En Interest
-
:
Encluding Interest = silent ,
assume

En-Interest
Cum-Interest
Including Interest
:

Lost
3
of Investment
XX
Purchase cost

Brokerage/Commission
+ XX

+ Stamp Duty XX

n Incidental Expenses like

brokerage ,
Commission , etc .

Purchase : + Sale :
-

Brokerage/Commission
5 as a % calculated on transaction price
In
6 case
of Cum-Interest : Interest to be deducted while

calculating Purchase a sale

cost proceeds .

.
7 Accured Interest :

Year Eed date do

Only
when Interest
Payment date & not match

Transaction &
8 Interest
Payment on same
day
:

Consider Transaction
first & then Interest .

9
Ques
If ·
is silent about FIFO
Weighted Average
or :

Assume
any method
Prefer FIFO

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CA NITIN GOEL AS 13: ACCOUNTING FOR INVESTMENTS

Dividend Income
Bearing Securities

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CA NITIN GOEL AS 13: ACCOUNTING FOR INVESTMENTS

Though
Divided edvex Rate
of Dividend

-Final
Dividend Interim Divided

Pue Acquisition Post Acquisition Assumed as

PostAcquisition
Bank Bank Du .
Alc-Du . Alc
-

Dividend
To Investment Alc To DividendA)C
P& LA/C
Tgd . to

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CA NITIN GOEL AS 13: ACCOUNTING FOR INVESTMENTS

CUM RIGHT PURCHASE: (Exception to Para 13 of AS 13)

PARA 13 of AS 13: When right shares offered are subscribed for, the cost of the right shares
is added to the carrying amount of the original holding. If rights are not subscribed for but are
sold in the market, the sale proceeds are taken to the profit and loss statement. However,
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.

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ASSIGNMENT QUESTIONS

TOPIC 1: INTEREST INCOME BEARING SECURITIES

Question 1 Pg no._____
st
Mr. Tushil purchased 1,000 nos. 10% debentures of ₹ 100 each on 1 April, 2021 at ₹ 96 cum–
interest, the previous interest date being 31st December, 2020.
Compute cost of investment & pass journal entry.

Question 2 (ICAI Study Material) Pg no._____

Mr. Purohit furnishes the following details relating to his holding in 8% Debentures (₹ 100
each) of P Ltd., held as Current assets:
1.4.2021 Opening balance – Face value ₹ 1,20,000, Cost ₹ 1,18,000
1.7.2021 100 Debentures purchased ex-interest at ₹ 98
1.10.2021 Sold 200 Debentures ex-interest at ₹ 100
1.1.2022 Purchased 50 Debentures at ₹ 98 ex-interest
1.2.2022 Sold 200 Debentures ex-interest at ₹ 99
Due dates of interest are 30th September and 31st March.
Mr. Purohit closes his books on 31.3.2022. Brokerage at 1% 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 31.3.2022 is ₹ 99.

Question 3 (RTP Nov 2020) (Similar) / ICAI Study Material Pg no._____

In 2020, M/s. Wye Ltd. issued 12% fully paid debentures of ₹ 100 each, interest being payable
half yearly on 30th September and 31st March of every accounting year.
On 1st December, 2021, 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 1st
March, 2022 firm sold all of these debentures at ₹ 103 ex-interest price, again paying
brokerage @ 1 % of ex-interest amount. Prepare Investment Account in books of M/s. Bull &
Bear for the period 1st Dec, 2021 to 1st Mar, 2022.

Question 4 (ICAI Study Material) Pg no._____

The following information is presented by Mr. Z (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).
1.3.2021 Purchased 200 units, ex-interest at ₹ 98.
1.7.2021 Sold 500 units, ex-interest out of original holding at ₹ 100.
1.10.2021 Purchased 150 units at ₹ 98, cum interest.
1.11.2021 Sold 300 units, ex-interest at ₹ 99 out of original holdings.
Interest dates are 30th September & 31st March. Mr. Z closes his books every 31st December.
Show the investment account as it would appear in his books. Mr. Z follows FIFO method.

Question 5 Pg no._____
Prepare Investment A/c in the above question assuming weighted average method is being
followed.

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Question 6 (RTP May 2023) Pg no._____

Remo Ltd. held on 1st April, 2021, 1000 9% Government Securities at ₹ 90,000 (Face Value of
Security ₹ 100 each). Three month's interest had accrued on the above date. On 1st May, the
company purchased the same Government Securities of the face value of ₹ 80,000 at ₹ 95
cum-interest. On 1st June, ₹ 60,000 face value of the security was sold at ₹ 94 cum-interest.
Interest on the security was paid each year on 30th June and 31st December and was credited
by the bank on the same date. On 30th September, ₹ 40,000 face value of the Govt. securities
were sold at ₹ 97 cum-interest. On 1st December, the company purchased the same security
₹ 10,000 at par ex-interest. On 1st March, the company sold ₹ 10,000 face value of the
government securities at ₹ 95 ex-interest.
You are required to draw up the 9% Government Security Account in the books of Remo
Limited. FIFO method shall be followed.
Calculation shall be made to the nearest rupee or multiple thereof.

TOPIC 2: DIVIDEND INCOME BEARING SECURITIES

Question 7 (ICAI Study Material) Pg no._____

Mr. X purchased 500 equity shares of ₹100 each in Omega Company Limited for ₹ 62,500
inclusive of brokerage and stamp duty. Some years later the company decided to capitalise
its profits and to issue to the holders of equity shares one equity share as Bonus for every
equity share held by them. Prior to capitalization, the shares of Omega Company Limited were
quoted at ₹ 175 per share. After the capitalization, the shares were quoted at ₹ 92.50 per
share. Mr. X sold the Bonus shares and received ₹90 per share. Prepare Investment A/c in
X’s books on average cost basis.

Question 8 (ICAI Study Material) Pg no._____

On 1.4.2021, 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 31.1.2022 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 & ₹ 90 per
share respectively. On 31.3.2022 Mr. Krishna Murty sold bonus shares to a Broker, who
charged 2% brokerage.
Prepare Investment Account in the books of Mr. Krishna Murty, who held shares as Current
assets & closing value shall be made at Cost or Market value whichever is lower.

Question 9 (ICAI Study Material) / (RTP Nov 2023) (Similar) Pg no._____

On 1st April, 2021, 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:
On 20th June, 2021 he purchased another 10,000 shares of P Ltd. at ₹ 16 per share.
On 1st August, 2021, P Ltd. issued one equity bonus share for every six shares held by the
shareholders.
On 31st October, 2021, 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 1/3rd of entitlement to Umang for a
consideration of ₹ 2 per share and subscribed the rest on 5th November, 2021.
You are required to prepare Investment A/c in the books of Rajat for the year ending 31st
March, 2022.

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 CA NITIN GOEL AS 13: ACCOUNTING FOR INVESTMENTS

Question 10 Pg no._____
On 1st January 2021, Singh had 20,000 equity shares in X Ltd. Face value of the shares was ₹
10 each but their book value was ₹ 16 per share. On 1st June 2021, Singh purchased 5,000 more
equity shares in the company at a premium of ₹ 4 per share.
On 30th June, 2021, 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, 2021. The terms of the rights issue were:
a) Rights shares to be issued to the existing holders on 10th August, 2021.
b) 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, 2021.
c) Existing shareholders may, to the extent of their entitlement, either wholly in part, transfer
their rights to outsiders.
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.
e) Dividends for the year ended 31st March, 2021, at the rate of 15% were declared by the
Company and received by Singh on 20th October, 2021.
f) On 1st November, 2021, Singh sold 20,000 equity shares at a premium of ₹ 3 per share.
The market price of share on 31-12-2021 was ₹ 13. Show the Investment Account as it would
appear in Singh’s books on 31-12-2021 and the value of shares held on that date.

Question 11 (RTP May 2020) Pg no._____

Meera carried out the following transactions in the shares of Kumar Ltd.:
(a) On 1st April, 2021 she purchased 40,000 equity shares of ₹ 1 each fully paid up for ₹ 60,000.
(b) On 15th May 2021, Meera sold 8,000 shares for ₹ 15,200.
(c) At a meeting on 15th June 2021, the company decided:
(i) To make bonus issue of 1 fully paidup share for every 4 shares held on 1st June 2021 &
(ii) To give its members the right to apply for one share for every five shares held on 1st
June 2021 at a price of ₹ 1.50 per share of which 75 paise is payable on or before 15th
July 2021 and the balance, 75 paise per share, on or before 15th September, 2021.
The shares issued under (i) and (ii) were not to rank for dividend for the year ending 31st
December 2021.
(a) Meera received his bonus shares and took up 4000 shares under the right issue, paying
the sum thereon when due and selling the rights of the remaining shares at 40 paise per
share; the proceeds were received on 30th September 2021.
(b) On 15th March 2022, he received a dividend from Kumar Ltd. of 15 per cent in respect of
the year ended 31st Dec 2021.
(c) On 30th March he received ₹ 28,000 from the sale of 20,000 shares
You are required to record these transactions in the Investment Account in Meera’s books for
the year ended 31st March 2022 transferring any profits or losses on these transactions to
Profit and Loss account. Apply average cost basis. Expenses and tax to be ignored.

Question 12 (Inter May 2018) (10 Marks) Pg no._____

Mr. Vijay entered into the following transactions of purchase and sale of equity shares of JP
Power Ltd. The shares have paid up value of ₹ 10 per share.
Date No. of Shares Terms
01.01.2021 600 Buy @ ₹ 20 per share
15.03.2021 900 Buy @ ₹ 25 per share
20.05.2021 1000 Buy @ ₹ 23 per share

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 CA NITIN GOEL AS 13: ACCOUNTING FOR INVESTMENTS

25.07.2021 2500 Bonus Shares received

20.12.2021 1500 Sale @ ₹ 22 per share
01.02.2022 1000 Sale @ ₹ 24 per share
Addition information:
1) On 15.09.2021 dividend @ ₹ 3 per share was received for the year ended 31.03.2021.
2) On 12.11.2021 company made a right issue of equity shares in the ratio of one share for five
shares held on payment of ₹ 20 per share. He subscribed to 60% of the shares and
renounced the remaining shares on receipt of the premium of ₹ 3 per share.
3) Shares are to be valued on weighted average cost basis.
You are required to prepare Investment Account for the year ended 31.03.2021 and 31.03.2022.

Question 13 Pg no._____
A Limited purchased 5,000 equity shares (face value ₹ 100 each) of Allianz Limited for ₹ 105
each on 1st April, 2021. The shares were quoted cum dividend. On 15th May, 2021, Allianz
Limited declared & paid dividend of 2% for year ended 31st March, 2021.
On 30th June, 2021 Allianz Limited issued bonus shares in ratio of 1:5. On 1st October, 2021
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 30th November, 2021.
Right shares were not entitled to dividend.
The company sold 3,000 shares on 31st December, 2021 at ₹ 95 per share. The company A Ltd.
incurred 2% as brokerage while buying and selling shares.
Prepare Investment Account in books of A Ltd. for the year ended 31st March, 2022.

TOPIC 3: INVESTMENT IN INTEREST & DIVIDEND BEARING SECURITIES

Question 14 Pg no._____
The following transactions of Nidhi took place during the year ended 31st March 2022:
Apr 1 Purchased ₹ 12,00,000, 8% bonds at ₹ 80.50 cum-interest. Interest is
payable on 1st November and 1st May.
Apr 12 Purchased 1,00,000 equity shares of ₹ 10 each in X Ltd. for ₹ 40,00,000
May 1 Received half-year's interest on 8% bonds.
May 15 X Ltd. made a bonus issue of three equity shares for every two held. Nidhi
sold 1,25,000 bonus shares for ₹ 20 each
Oct 1 Sold ₹ 3,00,000, 8% bonds at ₹ 81 ex- interest
Nov 1 Received half-year's bond interest.
Dec 1 Received 18% interim dividend on equity shares (including bonus shares) in
X Ltd.
Prepare relevant investment account in the books of Nidhi for the year ended 31st March, 2022.

Question 15 (Inter July 2021) (20 Marks) Pg no._____

Mr. Z has made following transactions during the financial year 2020-21:
Investment 1: 8% Corporate Bonds having face value ₹ 100.
Date Particulars
1.06.2020 Purchased 36,000 Bonds at ₹ 86 cum-interest. Interest is payable
on 30th September and 31st March every year
15.02.2021 Sold 24,000 Bonds at ₹ 92 ex-interest
Interest on the bonds is received on 30th September and 31st March.

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 CA NITIN GOEL AS 13: ACCOUNTING FOR INVESTMENTS

Investment 2: Equity Shares of G Ltd having face value ₹ 10

Date Particulars
01.04.2020 Opening balance 8,000 equity shares at a book value of ₹ 190 per share
01.05.2020 Purchased 7,000 equity shares@ ₹ 230 on cum right basis; Brokerage
of 1% was paid in addition.
15.06.2020 The company announced a bonus issue of 2 shares for every 5 shares
held
01.08.2020 The company made a rights issue of 1 share for every 7 shares held at
₹ 230 per share. The entire money was payable by 31.08.2020
25.08.2020 Rights to the extent of 30% of his entitlements was sold @ ₹ 75 per
share. The remaining rights were subscribed.
15.09.2020 Dividend @ ₹ 6 per share for the year ended 31.03.2020 was received
on 16.09.2020. No dividend payable on Right issue and Bonus issue.
01.12.2020 Sold 7,000 shares @ 260 per share. Brokerage of 1% was incurred
extra.
25.01.2021 Received interim dividend @ ₹ 3 per share for the year 2020-21.
31.03.2021 The shares were quoted in the stock exchange @ ₹ 260.
Both investments have been classified as Current investment in the books of Mr. Z. On 15th
May 2021, Mr. Z decides to reclassify investment in equity shares of G Ltd. as Long term
Investment. On 15th May 2021, shares were quoted in the stock exchange @ ₹ 180.
You are required to:
a) Prepare Investment Accounts in the books of Mr. Z for the year 2020-21, assuming that the
average cost method is followed.
b) Profit and loss Account for the year 2020-21, based on the above information.
c) Suggest values at which investment in equity shares should be reclassified in accordance
with AS 13.

Question 16 (RTP May 2019) Pg no._____

A Ltd. purchased on 1st April, 2021 8% convertible debenture in C Ltd. of face value of ₹
2,00,000 @ ₹ 108. On 1st July, 2021 A Ltd. purchased another ₹ 1,00,000 debenture @ ₹ 112 cum
interest.
On 1st October, 2021 ₹ 80,000 debenture was sold @ ₹ 105. On 1st December, 2021, C Ltd. give
option for conversion of 8% convertible debentures into equity share of ₹ 10 each. A Ltd.
receive 5,000 equity shares in C Ltd. in conversion of 25% debenture held on that date. The
market price of debenture and equity share in C Ltd. at the end of year 2021 is ₹ 110 and ₹ 15
respectively.
Interest on debenture is payable each year on 31st March, and 30th September. The accounting
year of A Ltd. is calendar year. Prepare investment account in the books of A Ltd. on average
cost basis.

TOPIC 4: CUM RIGHT PURCHASE

Question 17 (RTP Nov 2020) Pg no._____
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 all the rights for ₹ 15,000. The market value of the
shares after their becoming ex-rights has also gone down to ₹ 50,000. What should be the
accounting treatment in this case?

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 CA NITIN GOEL AS 13: ACCOUNTING FOR INVESTMENTS

Solution
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 ₹ 50,000.
In this case out of sale proceeds of ₹ 15,000, ₹ 10,000 may be applied to reduce the carrying
amount to bring it to market value ₹ 50,000 and ₹ 5,000 would be credited to the Profit & Loss
account.

Question 18 (RTP May 2021) Pg no._____

On 1st April, 2021 Mr. Shyam had an opening balance of 1000 equity shares of X Ltd ₹ 1,20,000
(face value ₹100 each). On 5.04.2021 he further purchased 200 cum-right shares for ₹ 135
each. On 8.04.2021 the director of X Ltd announced right issue in the ratio of 1:6.
Mr. Shyam waived off 100% of his entitlement of right issue in the favour of Mr. Rahul at the
rate of ₹ 20 each. All the shares held by Shyam had been acquired on cum right basis and the
total market price (ex-right) of all these shares after the declaration of rights got reduced by
₹ 3,400.
On 10.10.2021 Shyam sold 350 shares for ₹ 140 each.
On 31.03.2022, the market price of each share is ₹ 125 each.
You are required to prepare the Investment account in the books of Mr. Shyam for the year
ended 31.03.2022 assuming that the shares are being valued at average cost.

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PRACTICE QUESTIONS

TOPIC 1: INTEREST INCOME BEARING SECURITIES

Question 1 (Inter Nov 2023) (10 Marks) Pg no._____

Following information is given by Mr. Happy (stock broker) relating to his holding in 10%
Government Bonds:
a) Opening Balance as 1st April, 2022 was 5,000 units (Nominal value ₹ 100 each), Cost ₹
4,85,000
b) On 1st June, 2022, Purchased 600 units, cum-interest @ ₹ 99
c) On 1st August, 2022, Purchased 2400 units, ex-interest @ ₹ 97.50
d) On 1st October, 2022, Sold 2,500 units @ ₹ 98.50, ex-interest
e) On 1st January, 2023, Sold 3,000 units @ ₹ 99 cum interest
Interest is received on 30th June and 31st December each year. Mr. Happy closes his books on
31st March each year.
Prepare Investment Account in the books of Mr. Happy assuming that FIFO method of
valuation is followed by Mr. Happy.

Question 2 (RTP May 2022) Pg no._____

Mr. Wise had 12% Debentures of Face Value ₹ 100 of M/s. Alpha Ltd. as current investments.
He provides the following details relating to the investments.
Date Particulars
1-4-2021 Opening balance 4000 debentures costing ₹ 98 each
1-6-2021 Purchased 2000 debentures @ ₹ 120 cum interest
1-9-2021 Sold 3000 debentures @ ₹ 110 cum interest
1-12-2021 Sold 2000 debentures @ ₹ 105 ex interest
31-1-2022 Purchased 3000 debentures @ ₹ 100 ex interest
31-3-2022 Market value of the investments ₹ 105 each
Interest due dates are 30th June and 31st December.
Mr. Wise closes his books on 31-3-2022. He incurred 2% brokerage for all his transactions.
Show investment account in the books of Mr. Wise assuming FIFO method is followed.

Question 3 (Inter Nov 2019) (10 Marks) Pg no._____

Mr. Harsh provides the following details relating to his holding in 10% debentures (face value
of ₹ 100 each) of Exe Ltd., held as current assets:
1.4.2021 Opening balance – 12,500 debentures, cost ₹ 12,25,000
1.6.2021 Purchased 9,000 debentures @ ₹ 98 each ex-interest
1.11.2021 Purchased 12,000 debentures @ ₹ 115 each cum-interest
31.1.2022 Sold 13,500 debentures @ ₹ 110 each cum-interest
31.3.2022 Market value of debentures @ ₹ 115 each
Due dates of interest are 30th June and 31st December. Brokerage at 1% is to be paid for each
transaction. Mr. Harsh closes his books on 31.3.2022. Show investment account as it would
appear in his books assuming FIFO method is followed.

Question 4 (RTP May 2018) / (RTP Nov 2022) Pg no._____

Muskaan purchased 5,000, 13.5% Debentures of Face Value of ₹ 100 each of Shorya Ltd. on 1st
May 2021 @ ₹ 105 on cum interest basis. The interest on these instruments is payable on 31st

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& 30th of March & September respectively. On August 1st 2021 she again purchased 2,500 of
such debentures @ ₹ 102.50 each on cum interest basis. On October 1st, 2021 she sold 2,000
Debentures @ ₹ 103 each. The market value of the debentures as at the close of the year was
₹ 106.
Prepare the Debenture Investment Account in the books of Muskaan for the year ended 31st
Dec. 2021 on Average Cost Basis.

Question 5 (RTP May 2024) Pg no._____

ABC Ltd. holds 2,000, 15% Debentures of ₹ 100 each in XYZ Ltd. as on April 1, 2022 at a cost of
₹ 2,50,000.
Interest is payable on June, 30 and December, 31 each year.
Following are the details of 15% Debentures purchased and sold during the year 2022-23.
Date Particulars
On May 1, 2022 1,000 debentures are purchased cum-interest at ₹ 1,05,000
On November 1, 2022 1200 debentures are sold ex-interest at ₹ 1,28,200
On November 30, 2022 500 debentures are purchased ex-interest at ₹ 54,500
On December 31, 2022 900 debentures are sold cum-interest for ₹ 1,18,000
You are required to prepare the investment Account showing value of holdings on 31st March
2023 at cost, using FIFO Method.

TOPIC 2: DIVIDEND INCOME BEARING SECURITIES

Question 6 (Inter Sep 2024) (4 Marks) Pg no._____

On 01.04.2023, Mr. Day has 25,000 shares of Squares Ltd. at a book value of ₹ 25 per share
(nominal value of ₹ 10 each). Further information is as under:
(i) On 31st July 2023, the Directors of Squares Ltd. issued one equity bonus share for every
five shares held by the shareholders.
(ii) On 30th September 2023, the Directors of Squares Ltd. announced a right issue which
entitled the ·holders to subscribe three shares for every two shares at ₹ 20 per share.
Shareholders can transfer their rights in full or in part.
Mr. Day sold 1/4th of entitlement to Dhwani for a consideration of ₹ 5 per share and subscribed
the rest on 5th October, 2023.
You are required to prepare Investment A/c in the books of Mr. Day for the year ending
31.03.2024.

Question 7 (ICAI Study Material) Pg no._____

On 1st April, 2021, Mr. Vijay had 30,000 Equity shares in X Ltd. at a book value of ₹ 4,50,000
(Face Value ₹ 10 per share). On 22nd June, 2021, 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, 2021.
On 31st August, 2021 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, 2021, 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, 2021, Vijay received dividends from X Ltd. @ 20% for the year ended 31st
March, 2021. Dividend for the shares acquired by him on 22nd June, 2021 to be adjusted against
the cost of purchase.
On 15th November, 2021 Vijay sold 20,000 Equity shares at a premium of ₹ 5 per share.

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You are required to prepare Investment Account in the books of Mr. Vijay for the year ended
31st March, 2022 assuming the shares are being valued at average cost.

Question 8 (Inter Nov 2020) (10 Marks) Pg no._____

st
On 1 April, 2021 Mr. H had 30,000 equity shares of ABC Ltd. at a book value of ₹ 18 per share
(Nominal value 10 per share). On 10th June, 2021, H purchased another 10,000 equity shares of
the ABC Ltd. at ₹ 16 per share through a broker who charged 1.5% brokerage.
The directors of ABC Ltd. announced a bonus and a right issue. The terms of the issues were
as follows:
(i) Bonus shares were declared at the rate of one equity share for every four shares held
on 15th July, 2021.
(ii) Right shares were to be issued to the existing equity shareholders on 31st August, 2021.
The company decides to issue one right share for every five equity share held at 20%
premium and the due date for payment will be 30th September, 2021. Shareholders were
entitled to transfer their rights in full or in part.
(iii) No dividend was payable on these issues.
Mr. H subscribed 60% of the rights entitlements and sold the remaining rights for
consideration of ₹ 5 per share.
Dividends for the year ending 31st March, 2021 was declared by ABC Ltd. at the rate of 20% and
received by Mr. H on 31st October, 2021. On 15th January, 2022 Mr. H sold half of his
shareholdings at ₹ 17.50 per share and brokerage was charged @1%.
You are required to prepare Investment account in the books of Mr. H for the year ending 31st
March, 2022, assuming the shares are valued at average cost.

Question 9 (Inter Jan 2021) (10 Marks) Pg no._____

P Ltd. had 8,000 equity shares of K Ltd., at a book value of ₹ 15 per share (face value of ₹ 10
each) on 1st April, 2021. On 1st September, 2021, P Ltd. acquired another 2,000 equity shares of
K Ltd. at a premium of ₹ 4 per share. K Ltd. announced a bonus and right issue for existing
shareholders.
The term of bonus and right issue were:
(i) Bonus was declared at the rate of two equity shares for every five shares held on 30th
September, 2021.
(ii) Right shares are to be issued to the existing shareholders on 1st December, 2021. The
Company had issued two right shares for every seven shares held at 25% premium on
face value. No dividend was payable on these shares. The whole sum being payable by
31st December, 2021.
(iii) Existing shareholders were entitled to transfer their rights to outsiders either wholly or
in part.
(iv) P Ltd. exercised its option under the issue for 50% of its entitlements and sold the
remaining rights for ₹ 8 per share.
(v) Dividend for the year ended 31st March, 2021 at the rate of 20% was declared by K Ltd. and
received by P Ltd. on 20th January, 2022.
(vi) On 1st February, 2022, P Ltd. sold half of its shareholdings at a premium of ₹ 4 per share.
(vii) The market price of share on 31st March, 2022 was ₹ 13 per share.

You are required to prepare the Investment account of P Ltd. for the year ended 31st March,
2022 and determine the value of shares held on that date, assuming the investment as current
investment. Consider average cost basis for ascertainment of cost for equity share sold.

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Question 10 (ICAI Study Material) Pg no._____

On 1.4.2021 Sundar had 25,000 equity shares of X Ltd. at a book value of ₹15 per share (Nominal
value ₹10). On 20.6.2021, 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 issue were as follows:
Bonus–basis 1:6 (16.8.2021)
Rights–basis 3:7 (31.8.2021) price ₹15 per share
Due date for payment - 30.9.2021
Rights are transferable in full or in part. Accordingly, Sundar sold 33.33% of his entitlement
to Sekhar for a consideration of ₹2 per share. Dividend for the year ending 31.3.2021 at the
rate of 20% was declared by X Ltd & received by Sundar on 31.10.2021. Dividends for the share
acquired by him on 20.6.2021 are to be adjusted against the cost of purchase.
On 15.11.2021 Sundar sold 25,000 equity shares at premium of ₹5 per share.
You are required to prepare in the books of Sundar:
1) Investment A/c
2) Profit & Loss Account
Assume that the books are closed on 31.03.2022 and shares are valued at average cost.

Question 11 (ICAI Study Material) Pg no._____

On 1st April, 2021 XY Ltd. has 15,000 equity shares of ABC Ltd. at a book value of ₹ 15 per share
(nominal value ₹ 10 per share). On 1st June, 2021, XY Ltd. acquired 5,000 equity shares of ABC
Ltd. for ₹ 1,00,000. ABC Ltd. announced a bonus and right issue.
(1) Bonus was declared, at the rate of 1 equity share for every 5 shares held, on 1st July 2021.
(2) Right shares are to be issued to the existing shareholders on 1st September 2021. The
company will issue one right share for every 6 shares at 20% premium.
(3) No dividend was payable on these shares. Dividend for the year ended 31.3.2021 were
declared by ABC Ltd. @ 20%, which was received by XY Ltd. on 31st October 2021.
XY Ltd.
• Took up half the right issue
• Sold the remaining rights for ₹ 8 per share
• Sold half of its shareholding on 1st Jan, 2022 at ₹ 16.50 per share. Brokerage being 1%.
You are required to prepare Investment account of XY Ltd. for the year ended 31st March 2022
assuming the shares are being valued at average cost.

Question 12 (Inter May 2022) (5 Marks) Pg no._____

On 1st April 2021 Ms. Jayshree has 5,000 equity shares of Rama Limited (a listed company)
of face value of₹ 10 each. Ms. Jayshree has purchased the above shares at ₹ 15 per share
and paid a brokerage of 2% and stamp duty of 1 %.
On 15th May,2021 Ms. Jayshree purchased another 5,000 shares of Rama Limited at ₹ 18
including brokerage and stamp duty.
On 26th August,2021 Rama Limited issued one bonus equity share for every 1 equity share
held by the shareholders.
On 23rd October,2021 Rama Limited announced a Right Issue which entitles the holders to
subscribe 1 equity share for every 2 equity shares held at ₹ 20 per share. Shareholders can
exercise their rights in full or in part. Ms. Jayshree sold 1/4th of entitlement to Mr. Mike for
a consideration of ₹ 10 per share and subscribed the rest on 1st November 2021.
Ms. Jayshree also sold 10,000 shares at ₹ 25 per share on 1st November,2021. The shares of
Rama Limited were quoted at ₹ 11 per share on 31st March,2022.
You are required to prepare Investment account for Ms. Jayshree for the year ended 31st
March 2022.

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Question 13 (Inter Nov 2022) (10 Marks) Pg no._____

Mr. Saurabh held 10,000 equity shares of BT Limited on 1st April,2021. Nominal value of the
shares is ₹ 2 each and their book value is ₹ 7 per share.
• On 4th July,2021 he purchased another 7,500 shares at ₹ 10 each.
• On 31st July 2021 the company announced a Bonus and Right issue.
• Bonus was declared of one share for every five shares held and was received on 5th
August,2021.
• Right issue to be issued on 12th September,2021, which entitled the holders to subscribe
to additional 2 shares for every 7 shares held at ₹ 2 per share. Shareholders were
entitled to transfer their rights in full or part. Mr. Saurabh sold whole of his entitlements
to Mr. Nihal at ₹ 1.50 per share.
• Dividend was declared for the year ended 31st March,2021 @ 25% and received by Mr.
Saurabh on 19th September 2021.
• On 11th December 2021 Mr. Saurabh sold 7,500 shares at ₹ 8 per share.
• The market price of the shares on 31st March,2022 was ₹ 7 per share.
You are required to prepare the Investment Account of Mr. Saurabh on 31st March,2022
considering the above mentioned points, also state the value of shares held on that date.
(Assume investment as current investment)

TOPIC 3: INVESTMENT IN INTEREST & DIVIDEND BEARING SECURITIES

Question 14 (Inter Nov 2018) (10 Marks) / (RTP Nov 2021) (Similar) Pg no._____
Following transactions of Nisha took place during the financial year 2021-22
1st April, 2021 Purchased 9,000 8% bonds of ₹ 100 each at ₹ 80.50 cum interest. Interest
is payable on 1st November and 1st May.
1st May, 2021 Received half year’s interest on 8% bonds.
10 July, 2021 Purchased 12,000 equity shares of ₹ 10 each in Moon Limited for ₹ 44 each
through a broker, who charged brokerage @ 2%.
1st Oct 2021 Sold 2,250 8% bonds at ₹ 81 Ex-interest.
1st Nov, 2021 Received half year’s interest on 8% bonds.
15th Jan, 2022 Moon Limited made a rights issue of 1 equity share for every 4 Equity
shares held at ₹ 5 per share. Nisha exercised the option for 40% of her
entitlements and sold the balance rights in the market at ₹ 2.25 per share.
15th Mar, 2022 Received 18% interim dividend on equity shares of Moon Limited.
Prepare separate investment account for 8% bonds and equity shares of Moon Limited in the
books of Nisha for the year ended on 31st March, 2022. Assume that the average cost method
is followed.

Question 15 (Inter Dec 2021) (10 Marks) Pg no._____

During the year ended 31st March 2021, Purple Ltd. entered into the following transactions:
1st April, 2020 Purchased ₹ 4,00,000, 10% Govt. Loan (Interest payable on 30th April
and 31st October) at ₹70 cum interest.
1st April, 2020 Purchased 6,000 Equity Shares of ₹ 5 each in XY Ltd. for ₹1,26,000.
1st Oct, 2020 Sold 80,000 10%, Govt. Loan at 75 ex-interest
th
15 Jan, 2021 XY Ltd. made a bonus issue of four equity shares for every three
shares held. Purple Ltd. sold all of the bonus shares for ₹10 each.
1st Mar, 2021 Received Dividend @ 22% on shares in XY Ltd. for the year ended
31st December, 2020.
Prepare Investment Accounts in the books of Purple Ltd.

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Question 16 (RTP Nov 2019) Pg no._____

A Pvt. Ltd. follows the calendar year for accounting purposes. The company purchased 5,000
nos. of 13.5% Convertible Debentures of Face Value of ₹ 100 each of P Ltd. on 1st May 2021 @
₹ 105 on cum interest basis. The interest on these instruments is payable on 31st March &
30th September respectively. On August 1st 2021 the company again purchased 2,500 of such
debentures @ ₹ 102.50 each on cum interest basis. On October 1st, 2021 the company sold
2,000 Debentures @ ₹ 103 each. On 31st December, 2021 the company received 10,000 equity
shares of ₹ 10 each in P Ltd. on conversion of 20% of its holdings. The market value of the
debentures and equity shares as at the close of the year were ₹ 106 and ₹ 9 respectively.
Prepare the Debenture Investment Account & Equity Shares Investment Account in the books
of A Pvt. Ltd. for the year 2021 on Average Cost Basis.

Question 17 (Inter May 2023) (10 Marks) Pg no._____

The following information is given for Mr. Atwood for the year ended 31.03.2023:
01.04.2022 Mr. Atwood has 3,000 equity shares in Sun Limited at a book value of ₹
3,30,000 (nominal value ₹ 100 each).
01.07.2022 Purchased 1,500 equity shares in Sun Limited for ₹ 1,38,600.
01.08.2022 Purchased 5,000, 9% Bonds at ₹ 97 cum-interest (face value ₹ 100). The due
dates of interest are 1st September and 1st March.
02.10.2022 Dividend declared on equity shares and paid by Sun Limited for the year 2021-
2022 @ 10%
15.10.2022 Sun Limited made a bonus issue of two equity shares for every five shares
held.
01.01.2023 1,000 equity shares in Sun Limited sold @ ₹ 115 per share
31.03.2023 Sold 4,000, 9% Bonds @ ₹ 99 ex-interest
1. The market price of Equity Shares of Sun Limited is ₹ 125 each and Bonds ₹ 98 each on
31st March 2023.
2. Interest on bonds was received on due dates.
You are required to prepare Investment Account in the books of Mr. Atwood for the year ended
31st March 2023, assuming that the investments are valued at the average cost or market
value, whichever is lower. (Round off to nearest Rupee)

TOPIC 4 CUM RIGHT PURCHASE

Question 18 (ICAI Study Material) Pg no._____

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?

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AS 13: CASE Study- ASSIGNMENT QUESTIONS

Question 1 (ICAI Study Material)

M/s Innovative Garments Manufacturing Company Limited invested in the shares of another
company on 1st October, 2021 at a cost of ₹ 2,50,000. It also earlier purchased Gold of ₹
4,00,000 and Silver of ₹ 2,00,000 on 1st March, 2019.
Market value as on 31st March, 2022 of above investments are as follows:
Shares 2,25,000 Gold 6,00,000 Silver 3,50,000
How above investments will be shown in the books of accounts of M/s Innovative Garments
Manufacturing Company Limited for the year ending 31st March, 2022 as per the provisions of
Accounting Standard 13 "Accounting for Investments"?

Solution
As per AS 13 ‘Accounting for Investments’, For investment in shares –
If the investment is purchased with an intention to hold for short-term period (less than one
year), then it will be classified as current investment and to be carried at lower of cost and
fair value, i.e., in case of shares, at lower of cost (₹ 2,50,000) and market value (₹ 2,25,000)
as on 31 March 2022, i.e., ₹ 2,25,000.
If equity shares are acquired with an intention to hold for long term period (more than one
year), then should be considered as long-term investment to be shown at cost in the Balance
Sheet of the company. However, provision for diminution should be made to recognise a
decline, if other than temporary, in the value of the investments.
Gold and silver are generally purchased with an intention to hold it for long term period (more
than one year) until and unless given otherwise. Hence, the investment in Gold and Silver
(purchased on 1st March, 2019) should continue to be shown at cost (since there is no ‘other
than temporary’ diminution) as on 31st March, 2022, i.e., ₹ 4,00,000 and ₹ 2,00,000
respectively, though their market values have been increased.

Question 2
Albert Ltd. has made the following investments:
(a) Purchased the following equity shares from stock exchange on 1st June, 2021:
Cost
Scrip X 1,80,000
Scrip Y 50,000
Scrip Z 1,70,000
4,00,000
(b) Purchased government securities at a cost of ₹ 5,00,000 on 1st April, 2021. How will you
treat these investments as per applicable AS in the books of the company for the year
ended on 31st March, 2022, if the values of these investments are as follows
Shares ₹ ₹
Scrip X 1,90,000
Scrip Y 40,000
Scrip Z 70,000 3,00,000
Government securities 7,00,000

Solution
As per AS 13 ‘Accounting for Investments’, current investments should be carried at lower of
cost and fair value determined either on an individual investment basis or by category of
investment, but not on an overall (or global) basis.

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 CA NITIN GOEL AS 13: ACCOUNTING FOR INVESTMENTS

Longterm investments are carried at cost except when there is decline, other than temporary,
in the value of long term investment, the carrying amount is reduced to recognise the decline.
a) If the investment in shares is intended to be held as current investment then
Scrip X should be valued at cost i.e. ₹1,80,000 (lower of cost and fair value),
Scrip Y should be valued at fair value i.e. ₹ 40,000 (lower of cost and fair value) and
Scrip Z should be valued at fair value i.e. ₹ 70,000 (lower of cost and fair value).
The total loss of ₹ 1,10,000 on scrip’s purchased on 1st June, 2021 is to be charged to profit
and loss account for the year ended 31st March, 2022.
If investment is intended to be held as long term investment, then it will continue to be
shown at cost in the balance sheet of the company. However, provision for diminution shall
be made to recognize a decline, other than temporary, in the value of investments, such
reduction being determined and made for each investment individually.
b) Value of government securities (purchased on 1st April, 2021) is to be shown at cost of ₹
5,00,000 in the balance sheet as on 31.3.2022

Question 3
The Investment portfolio of XYZ Ltd. as on 31.03.2022 consisted of the following:
(₹ In Lacs)
Current Investments Cost Fair Value as on
31.03.2022
1 1000 Equity Shares of A Ltd. 5 7
2 500 Equity Shares of B Ltd. 10 15
3 1000 Equity Shares of C Ltd. 15 12
30 34
Give your comments on below:
(i) The company wants to value the above portfolio at ₹ 30 lakhs being lower of cost or fair
market value.
(ii) Company wants to transfer 1000 Equity Shares of C Ltd. from current investments to long
term investments on 31.03.2022 at cost of ₹ 15 lakhs.

Solution
As per AS 13 “Accounting for Investments”, Valuation of current investments on overall (or
global) basis is not considered appropriate. Sometimes, the concern of an enterprise may be
with the value of a category of related current investments and not with each individual
investment, and accordingly the investments may be carried at the lower of cost and fair value
computed category-wise (i.e. equity shares, preference shares, convertible debentures, etc.).
However, the more prudent and appropriate method is to carry investments individually at
the lower of cost and fair value.
(i) Hence the company has to value the current investment at ₹ 27 Lacs (A Ltd. shares at ₹ 5
lacs; B Ltd. shares at ₹ 10 lacs and C Ltd. shares at ₹ 12 lacs). The company’s decision to
value the portfolio at ₹ 30 lacs is not appropriate.
(ii) Moreover, where investments are reclassified from current to long-term, transfers are
made at the lower of cost and fair value at the date of transfer. Hence, the company has
to make transfer of 1,000 equity shares of C Ltd.at ₹ 12 lacs (fair value) and not ₹ 15 lacs
(cost) as the fair value is less than cost.

Question 4 (ICAI Study Material)

ABC Ltd. wants to re-classify its investments in accordance with AS–13. Decide and state on
the amount of transfer, based on the following information:

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a) A portion of Current Investments purchased for ₹ 20 lakhs, to be reclassified as Long

Term investment, as the company has decided to retain them. The market value as on the
date of Balance Sheet was ₹ 25 lakhs.
b) Another portion of current investments purchased for ₹ 15 lakhs, to be reclassified as
long term investments. The market value of these investments as on the date of balance
sheet was ₹ 6.5 lakhs
c) Certain long-term investments no longer considered for holding purposes, to be
reclassified as current investments. The original cost of these was ₹18 lakhs but had been
written down to ₹ 12 lakhs to recognize other than temporary decline as per AS 13.

Solution
As per AS 13, where investments are reclassified from current to long-term, transfers are
made at the lower of cost and fair value at the date of transfer.
a) In the first case, the market value of the investment is ₹ 25 lakhs, which is higher than its
cost i.e. ₹ 20 lakhs. Therefore, the transfer to long term investments should be carried at
cost i.e. ₹ 20 lakhs.
b) In the second case, the market value of the investment is ₹ 6.5 lakhs, which is lower than
its cost i.e. ₹ 15 lakhs. Therefore, the transfer to long term investments should be carried
in the books at the market value i.e. ₹ 6.5 lakhs. The loss of ₹ 8.5 lakhs should be charged
to profit and loss account.
As per AS 13, where long-term investments are re-classified as current investments,
transfers are made at the lower of cost and carrying amount at the date of transfer.
c) In the third case, the book value of the investment is ₹ 12 lakhs, which is lower than its cost
i.e. ₹ 18 lakhs. Here, the transfer should be at carrying amount and hence this reclassified
current investment should be carried at ₹ 12 lakhs.

Question 5 (RTP May 2020) (Similar) / (ICAI Study Material)

Bluechip Equity Investments Ltd, wants to reclassify its investments in accordance with AS13.
State the values, at which the investments have to be reclassified in the following cases.
a) Long term investments in Company A, costing ₹ 8.5 lakhs are to be re-classified as current.
The company had reduced the value of these investments to ₹ 6.5 lakhs to recognize a
‘other than temporary’ decline in value. The fair value on date of transfer is ₹ 6.8 lakhs.
b) Long term investments in Company B, costing ₹ 7 lakhs are to be re-classified as current.
The fair value on date of transfer is ₹ 8 lakhs and book value is ₹ 7 lakhs.
c) Current investment in Company C, costing ₹ 10 lakhs are to be re-classified as long term
as the company wants to retain them. The market value on date of transfer is ₹ 12 lakhs.

Solution
As per AS 13 ‘Accounting for Investments’, where long-term investments are reclassified as
current investments, transfers are made at the lower of cost and carrying amount at the date
of transfer. Where investments are reclassified from current to long term, transfers are made
at lower of cost and fair value on the date of transfer.
Accordingly, the re-classification will be done on the following basis:
a) In this case, carrying amount of investment on the date of transfer is less than the cost;
hence this re-classified current investment should be carried at ₹ 6.5 lakhs in the books
b) The carrying / book value of the long term investment is same as cost i.e. ₹ 7 lakhs. Hence
this long term investment will be reclassified as current investment at book value of ₹ 7
lakhs only.
c) In this case, reclassification of current investment into long-term investments will be made
at ₹ 10 lakhs as cost is less than its market value of ₹ 12 lakhs.

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Question 6 (Inter May 2019) (5 Marks)

On 15th June, 2021, Y limited wants to re-classify its investments in accordance with AS 13.
Decide and state the amount of transfer, based on the following information:
1) A portion of long term investments purchased on 1st March, 2020 are to be reclassified as
current investments. The original cost of these investments was ₹ 14 lakhs but had been
written down by ₹ 2 lakhs (to recognise 'other than temporary' decline in value). The market
value of these investments on 15th June, 2021 was ₹ 11 lakhs.
2) Another portion of long term investments purchased on 15th January, 2020 are to be re-
classified as current investments. The original cost of these investments was ₹ 7 lakhs but
had been written down to ₹ 5 lakhs (to recognize 'other than temporary' decline in value).
The fair value of these investments on 15th June, 2021 was ₹ 4.5 lakhs.
3) A portion of current investments purchased on 15th March, 2021 for ₹ 7 lakhs are to be re-
classified as long term investments, as the company has decided to retain them. The
market value of these investments on 31st March, 2021 was ₹ 6 lakhs and fair value on 15th
June 2021 was ₹ 8.5 lakhs,
4) Another portion of current investments purchased on 7th December, 2020 for ₹ 4 lakhs are
to be re-classified as long term investments. The market value of these investments was:
on 31st March, 2021 ₹ 3.5 lakhs on 15th June, 2021 ₹ 3.8 lakhs

Solution
As per AS 13 ‘Accounting for Investments’, where long-term investments are reclassified as
current investments, transfers are made at the lower of cost and carrying amount at the date
of transfer; and where investments are reclassified from current to long term, transfers are
made at lower of cost and fair value on the date of transfer. Accordingly, the re-classification
will be done on the following basis:
1) In this case, carrying amount of investment on the date of transfer is less than the cost;
hence this re-classified current investment should be carried at ₹ 12 lakhs in the books.
2) In this case also, carrying amount of investment on the date of transfer is less than cost;
hence this re-classified current investment should be carried at ₹ 5 lakhs in the books.
3) In this case, reclassification of current investment into long-term investments will be made
at ₹ 7 lakhs as cost is less than its fair value of ₹ 8.5 lakhs on the date of transfer.
4) In this case, market value (considered as fair vale) is ₹ 3.8 lakhs on the date of transfer
which is lower than the cost of ₹ 4 lakhs. The reclassification of current investment into
long-term investments will be made at ₹ 3.8 lakhs.

Question 7 (RTP Nov 2020) / (ICAI Study Material)

X Ltd. on 1-1-2022 had made an investment of ₹ 600 lakhs in the equity shares of Y Ltd. of
which 50% is made in the long term category and the rest as temporary investment. The
realizable value of all such investment on 31-3-2022 became ₹ 200 lakhs as Y Ltd. lost a case
of copyright. From the given market conditions, it is apparent that the reduction in the value
is not temporary in nature.
How will you recognize the reduction in financial statements for the year ended on 31-3-2022?

Solution
X Ltd. invested ₹ 600 lakhs in the equity shares of Y Ltd. Out of the same, the company intends
to hold 50% shares for long term period i.e. ₹ 300 lakhs and remaining as temporary (current)
investment i.e. ₹ 300 lakhs.
In the given situation, the realizable value of all such investments on 31.3.2022 became ₹ 200
lakhs i.e. ₹ 100 lakhs in respect of current investment and ₹ 100 lakhs in respect of long term
investment.

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As per AS 13, ‘Accounting for Investment’, the carrying amount for current investments is the
lower of cost and fair value. Accordingly, the carrying value of investment held as temporary
investment should be shown at realizable value i.e. at ₹ 100 lakhs. The reduction of ₹ 200
lakhs in carrying value of current investment will be charged to the profit and loss account.
The Standard further states that long-term investments are usually carried at cost. However,
when there is a decline, other than temporary, in the value of long term investment, the
carrying amount is reduced to recognise the decline.
Here, Y Ltd. lost a case of copyright which drastically reduced the realisable value of its
shares to one third which is quiet a substantial figure. Losing the case of copyright may affect
the business and the performance of the company in long run. Accordingly, it will be
appropriate to reduce the carrying amount of long term investment by ₹ 200 lakhs and show
the investments at ₹ 100 lakhs, since the downfall in the value of shares is other than
temporary. The reduction of ₹ 200 lakhs in the carrying value of long term investment will be
charged to the Statement of profit and loss.

Question 8 (ICAI Study Material)

An unquoted long–term investment is carried in the books at cost of ₹ 2 lacs. The published
accounts of unlisted company received in May, 2021 showed that the company has incurred
cash losses with decline market share and the long–term investment may not fetch more
than ₹ 20,000. How you will deal with it in preparing the financial statements of investing
enterprise for the year ended 31.3.2021?
Solution
Investments classified as long term investments should be carried in the financial statements
at cost. However, provision for diminution shall be made to recognise a decline, other than
temporary, in the value of the investments, such reduction being determined and made for
each investment individually.
AS 13 ‘Accounting for Investments’ states that indicators of the value of an investment are
obtained by reference to its market value, the investee's assets and results and the expected
cash flows from the investment. On these bases, the facts of the given case clearly suggest
that the provision for diminution should be made to reduce the carrying amount of long term
investment to ₹ 20,000 in the financial statements for the year ended 31st March, 2021.
The answer has been given on the assumption that the financial statements are yet to be
completed and approved by the Board of Directors. Also, the fall in value of investments has
been considered on account of conditions existing on the balance sheet date.

Question 9 (RTP Nov 2019) / (RTP Nov 2021)

Sabka Bank has classified its total investment on 31-3-2022 into three categories (a) held to
maturity (b) available for sale (c) held for trading as per the RBI guidelines.
‘Held to maturity’ investments are carried at acquisition cost less amortised amount.
‘Available for sale’ investments are carried at marked to market. ‘Held for trading’
investments are valued at weekly intervals at market rates. Net depreciation, if any, is
charged to revenue and net appreciation, if any, is ignored.
Comment whether the policy of the bank is in accordance with AS 13?
Solution
As per AS 13 ‘Accounting for Investments’, the accounting standard is not applicable to Bank,
Insurance Company, Mutual Funds. In this case Sabka Bank is a bank, therefore, AS 13 does
not apply to it. For banks, the RBI has issued guidelines for classification and valuation of its
investment and Sabka Bank should comply with those RBI Guidelines/Norms. Therefore,
though Sabka Bank has not followed the provisions of AS 13, yet it would not be said as non-
compliance since, it is complying with the norms stipulated by the RBI.

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Question 10 (RTP Sep 2024)

A company is engaged in the business of refining, transportation and marketing of petroleum
products. During the financial year ended 31st March, 2024, the company acquired controlling
interest from Government of India in another public sector undertaking @ ₹ 1,551 per share
as against the book value of ₹ 192.58 per share and market value of ₹ 876 per share as on
18th February, 2024. Thus, the strategic premium of ₹ 675 per share has been paid considering
various tangible and intangible factors.
The above investment in the shares of the acquired company has been considered as long-
term strategic investment and, therefore, has been accounted for at cost, i.e. at ₹ 1,551 per
share in the financial statements. No provision for diminution in value has been made in the
books of account.
As per the requirement of Schedule III to the Companies Act, 2013, the aggregate market value
of the quoted shares has been properly reflected in the financial statements.
On 28th March, 2024, the acquired shares were quoted at ₹ 880 per share on BSE and the
current market price as on 18th July was around ₹ 300.
Considering the tangible and intangible benefits the Management is of the view that there is
no permanent diminution in the value of the strategic investment in the acquired company, as
the same has been considered as a long-term investment. Therefore, there is no need for
provision for diminution in the value of the shares of the acquired company.

Required:
(i) 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.
(ii) If any provision for diminution in the value is to be made, whether such provision should
be charged to the profit and loss account or whether same can be considered as deferred
expenditure and amortised over a period of 5 years. Whether it is open for the company
to charge off such diminution in the value in the books of account instead of creating
provision.
(iii) Whether the premium paid for strategic benefits for investment described in facts of the
case, can be accounted for separately in the books of account keeping in view that AS 13
specifies that long term investments should be recorded at cost and there is no specific
provision in the standard in respect of accounting for premium paid for strategic benefits.

Solution
(i) The accounting treatment 'at cost' under the head 'Long Term Investment’ in the separate
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.

(ii) The provision for diminution in the value of investment should be a charge to the profit
and loss statement. As per the requirements of AS 13, the diminution in the value of
investment can neither be accounted for as deferred revenue expenditure nor it can be
written off in the statement of profit and loss.

(iii) The long-term investments should be carried at cost as per the requirements of AS 13.
The amount paid over and above the market price should be treated as cost and cannot
be accounted for separately.

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AS 13: CASE Study- PRACTICE QUESTIONS

Question 1 (Inter May 2019) (1 Marks)

State whether the following statement is 'True' or 'False'. Also give reason for your answer.
As per the provisions of AS-13, a current investment is an investment, that by its nature, is
readily realisable and is intended to be held for not more than six months from the date on
which such investment is made.
Solution
False: A current investment is an investment that is by its nature readily realizable and is
intended to be held for not more than 1 year from the date on which such investment is made.

Question 2 (RTP May 2023) / (RTP Nov 2018) (Similar) / (ICAI Study Material)
Gowtham Limited invested in shares of another company (with the intention to hold the shares
for short-term period) on 30th November, 2021 at a cost of ₹ 4,25,000. It also earlier
purchased Gold of ₹ 8,00,000 and Silver of ₹ 3,50,000 on 31st March, 2019.
Market values as on 31st March, 2022, of the above investments are as follows:
Shares ₹ 3,50,000 Gold ₹ 10,25,000 Silver ₹ 5,10,000
You are required to explain how will the above investments be shown (individually and in
total) in the books of account of Gowtham Limited for the year ending 31st March, 2022 as per
the provisions of AS 13.
Solution
As per AS 13 ‘Accounting for Investments’, for investment in shares - if the investment
is purchased with an intention to hold for short-term period (less than one year), then it will
be classified as current investment and to be carried at lower of cost and fair value, i.e., in
case of shares, at lower of cost (₹ 4,25,000) and market value (₹ 3,50,000) as on 31 March
2022, i.e., ₹ 3,50,000.
If equity shares are acquired with an intention to hold for long term period (more than
one year), then should be considered as long-term investment to be shown at cost in the
Balance Sheet of the company. However, provision for diminution should be made to
recognise a decline, if other than temporary, in the value of the investments.
Gold and silver are generally purchased with an intention to hold it for long term period
(more than one year) until and unless given otherwise. Hence, the investment in Gold and
Silver (purchased on 31st March, 2019) should continue to be shown at cost (since there is no
‘other than temporary’ diminution) as on 31st March, 2022, i.e., ₹ 8,00,000 and ₹3,50,000
respectively, though their market values have been increased.
Thus the shares, gold and silver will be shown at ₹ 3,50,000, ₹ 8,00,000 and ₹ 3,50,000
respectively and hence, total investment will be valued at ₹ 15,00,000 for the year ending on
31st March, 2022 as per AS 13

Question 3 (Inter Nov 2020) (5 Marks)

A Limited invested in the shares of XYZ Ltd. on 1st December, 2021 at a cost of ₹ 50,000. Out
of these shares, ₹ 25,000 shares were purchased with an intention to hold for 6 months and
₹ 25,000 shares were purchased with an intention to hold as long-term Investment.
A Limited also earlier purchased Gold of ₹ 1,00,000 and Silver of ₹ 30,00,000 on 1st April, 2021.
Market value as on 31st March, 2022 of above investments are as follows:
Shares ₹ 47,500 (Decline in the value of shares is temporary.)
Gold ₹ 1,80,000
Silver ₹ 30,55,000

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How above investments will be shown in the books of accounts of M/s A Limited for the year
ended 31st March, 2022 as per the provisions of AS 13 ?

Solution
As per AS 13 ‘Accounting for Investments’, for investment in shares - if the investment is
purchased with an intention to hold for short-term period (less than one year), then it will be
classified as current investment and to be carried at lower of cost and fair value.
In the given case ₹ 25,000 shares held as current investment will be carried in the books at
₹ 23,750 (₹ 47,500/2). If equity shares are acquired with an intention to hold for long term
period (more than one year), then should be considered as long-term investment to be shown
at cost in the Balance Sheet of the company. However, provision for diminution should be
made to recognize a decline, if other than temporary, in the value of the investments. Hence,
₹ 25,000 shares held as long-term investment will be carried in the books at ₹ 25,000.
Gold and silver are generally purchased with an intention to hold them for long term period
(more than 1 year) until & unless given otherwise. Hence, investment in Gold & Silver
(purchased on 1st April, 2021) should continue to be shown at cost (since there is no ‘other
than temporary’ diminution) as on 31st March, 2022. Thus Gold at ₹ 1,00,000 & Silver at ₹
30,00,000 respectively will be shown in the books.

Question 4 (RTP Nov 2022)

Mother Mart Ltd wants to reclassify its investment in accordance with AS 13. Decide treatment
to be given in each of the following cases assuming that market value has been determined
in an arm's length transaction between knowledgeable and willing buyer and seller:
(i) A portion of current investments purchased for ₹ 25 lakhs to be reclassified as long term
investments, as the company has decided to retain them. The market value as on the
date of balance sheet was ₹ 30 lakhs.
(ii) Another portion of current investments purchased for ₹ 20 lakhs has to be reclassified
as long-term investments. The market value of these investments as on the date of the
balance sheet was ₹ 12.5 lakhs.
(iii) One portion of long-term investments, no longer considered for holding purposes, to be
reclassified as current investments. The original cost of these was ₹ 15 lakhs, but had
been written down to ₹ 11 lakhs to recognize permanent decline as per AS 13.

Solution
As per AS 13 ‘Accounting for Investments’, where investments are reclassified from current
to long-term, transfers are made at the lower of cost and fair value at the date of transfer.
When long-term investments are re-classified as current investments, transfers are made
at the lower of cost and carrying amount at the date of transfer.
(i) In the first case, the market value of the investments is ₹ 30 lakhs, which is higher than
its cost i.e. ₹ 25 lakhs. Therefore, the transfer to long term investments should be made
at cost i.e. ₹ 25 lakhs
(ii) In the second case, the market value of the investment is ₹ 12.5 lakhs, which is lower than
its cost i.e. ₹ 20 lakhs. Therefore, the transfer to long term investments should be made
in the books at the market value i.e. ₹ 12.5 lakhs. The loss of ₹ 7.50 lakhs (20-12.5) should
be charged to Profit and Loss account.
(iii) In the third case, the book value of the investments is ₹ 11 lakhs, which is lower than its
cost, i.e. ₹ 15 lakhs. As the transfer should be at carrying amount, hence this reclassified
current investment should be carried at ₹ 11 lakhs.

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Question 5 (Inter Jan 2021) (5 Marks)

Kunal Securities Ltd. wants to reclassify its investments in accordance with AS-13). State the
values, at which the investments have to be reclassified in the following cases:
(i) Long term investment in Company A, costing ₹ 10.5 lakhs is to be re-classified as current
investment. The company had reduced the value of these investments to ₹ 9 lakhs to
recognize a permanent decline in value. The fair value on the date of reclassification is
₹ 9.3 lakhs.
(ii) Long term investment in Company B, costing ₹ 14 lakhs is to be re-classified as current
investment The fair value on the date of reclassification is ₹ 16 lakhs and book value is ₹
14 lakhs.
(iii) Current investment in Company C, costing ₹ 12 lakhs is to be re-classified as long term
investment as the company wants to retain them. The market value on the date of
reclassification is ₹ 13.5 lakhs.
(iv) Current investment in Company D, costing ₹ 18 lakhs is to be re-classified as long term
investment. The market value on the date of reclassification is ₹ 16.5 lakhs.

Solution
As per AS 13 ‘Accounting for Investments’, where long-term investments are reclassified as
current investments, transfers are made at the lower of cost and carrying amount at the date
of transfer. And where investments are reclassified from current to long term, transfers are
made at lower of cost and fair value on the date of transfer.
Accordingly, the re-classification will be done on the following basis:
(i) In this case, carrying amount of investment on the date of transfer is less than the cost;
hence this re-classified current investment should be carried at ₹ 9 lakhs in the books.
(ii) The carrying / book value of the long-term investment is same as cost i.e., ₹ 14 lakhs.
Hence this long-term investment will be reclassified as current investment at book value
of ₹ 14 lakhs only.
(iii) In this case, reclassification of current investment into long-term investments will be
made at ₹ 12 lakhs as cost is less than its market value of ₹ 13.5 lakhs.
(iv) Market value of the investment is ₹ 16.5 lakhs, which is lower than its cost i.e., ₹ 18 lakhs.
Therefore, the transfer to long term investments should be done in the books at the
market value i.e., ₹ 16.5 lakhs.

Question 6 (RTP May 2018) / (RTP May 2019)

How you will deal with following in the financial statement of the Paridhi Electronics Ltd. as
on 31.3.22 with reference to AS-13?
a) Paridhi Electronics Ltd. invested in the shares of another unlisted company on 1st May 2018
at a cost of ₹ 3,00,000 with the intention of holding more than a year. The published
accounts of unlisted company received in January, 2022 reveals that the company has
incurred cash losses with decline market share and investment of Paridhi Electronics Ltd.
may not fetch more than ₹ 45,000.
b) Also Paridhi Electronics Ltd. has current investment (X Ltd.’s shares) purchased for ₹5
lakhs, which the company want to reclassify as long term investment. The market value of
these investments as on date of Balance Sheet was ₹ 2.5 lakhs.
Solution
a) As per AS 13, “Accounting for investments” Investments classified as long term investments
should be carried in the financial statements at cost. However, provision for diminution
shall be made to recognise a decline, other than temporary, in the value of the investments,

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such reduction being determined and made for each investment individually. The standard
also states that indicators of the value of an investment are obtained by reference to its
market value, the investee's assets and results and the expected cash flows from the
investment. On this basis, the facts of the given case clearly suggest that the provision for
diminution should be made to reduce the carrying amount of shares to ₹ 45,000 in the
financial statements for the year ended 31st March, 2022 and charge the difference of loss
of ₹ 2,55,000 to Profit and Loss account.
b) As per AS 13 ‘Accounting for Investments’, where investments are reclassified from current
to long-term, transfers are made at the lower of cost or fair value at the date of transfer.
In the given case, the market value of the investment (X Ltd. shares) is ₹ 2.50 lakhs, which
is lower than its cost i.e. ₹5 lakhs. Therefore, the transfer to long term investments should
be made at cost i.e. ₹2.50 lakhs. The loss of ₹ 2.50 lakhs should be charged to profit and
loss account.

Question 7 (RTP May 2021)

Paridhi Electronics Ltd. invested in the shares of Dhansukh Ltd. on 1st May 2021 at a cost of ₹
10,00,000. Three fourth of these investments were current investments and the remaining
investments were intended to be held for more than a year. The published accounts of
Dhansukh Ltd. received in January, 2022 reveals that the company has incurred cash losses
with decline in market share and investment of Paridhi Electronics Ltd. may not fetch more
than 7,50,000. The reduction in value is apparent to be non-temporary.
You are required to explain how you will deal with the above in the financial statements of the
Paridhi Electronics Ltd. as on 31.3.22 with reference to AS 13?

Solution
As per AS 13, “Accounting for Investments”, carrying amount for current investments is the
lower of cost and fair value. But long term investments should be carried in the financial
statements at cost. However, provision for diminution shall be made to recognize a decline,
other than temporary, in the value of the investments, such reduction being determined and
made for each investment individually. The standard also states that indicators of the value
of an investment are obtained by reference to its market value, the investee's assets and
results and the expected cash flows from the investment.
Paridhi Ltd. made three fourth of ₹ 10,00,000 ie. ₹7,50,000 as current investment and
remaining ₹ 2,50,000 as long term. The facts of the case given in the question clearly suggest
that the provision for diminution should be made to reduce the carrying amount of shares for
both categories of shares to bring them to market value. Hence the carrying value of
investments will be shown at amount of ₹ 7,50,000 in the financial statements for the year
ended 31st March, 2022 and charge the difference of loss of ₹ 2,50,000 to profit and loss
account

Question 8 (Inter Dec 2021) (5 Marks)

Mr. Mohan has invested some money in various Mutual funds. Following information in this
regard is given:
Mutual Date of purchase Purchase Brokerage Stamp Market value as
Funds cost (₹) Cost (₹) duty (₹) on 31.03.2021 (₹)
A 01.05.2017 50,000 200 20 48,225
B 05.08.2020 25,000 150 25 24,220
C 01.01.2021 75,000 300 75 78,190
D 07.05.2020 70,000 275 50 65,880

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You are required to:

a) Classify his investment in accordance with AS-13.
b) Value of Investment in mutual fund as on 31.03.2021

Solution
As per AS 13 “Accounting for Investments”, a current investment is an investment that is by
its nature readily realizable and is intended to be held for not more 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.
A long-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 recognize the decline.
Mutual Funds Classification Cost (₹) Market value (₹) Carrying value (₹)
A Long-term 50,220 48,225* 50,220
Investment
B Current Investment 25,175 24,220 24,220
C Current Investment 75,375 78,190 75,375
D Current Investment 70,325 65,880 65,880
Total 2,15,695
Note: *The reduction in value of Mutual fund A is considered to be temporary. If reduction in
Market value is assumed as other than temporary in nature, then the carrying value of
₹48,225 will be considered.

Question 9 (RTP May 2022) Pg no._____

JVR Limited has made investment of ₹ 97.84 Crores in Equity Shares of QSR Limited in
2016-17. The investment has been made at par. QSR Limited has been in continuous losses
for the last 2 years. JVR Limited is willing to re-assess the carrying amount of its
investment in QSR Limited and wish to provide for diminution in value of investment for the
year ended 31st March, 2021. Discuss whether the connection of JVR Limited to bring down
the carrying Amount of investment in QSR Limited is in accordance with AS.

Solution
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 realizable and is intended
to be held for not more 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. The investments
referred in the question can be classified as long-term investments and 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
recognize the decline.
The contention of the company to bring down the value of investment may be correct if the
decline in value is permanent in nature and the reduction in carrying amount may be 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.

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Question 10 (Inter Nov 2022) (5 Marks)

a) An unquoted long term investment made in the shares of Rachel Limited is carried in the
books of Ziva Limited at a cost of ₹ 1,00,000. The audited financial statements of Rachel
Limited received in May,2021 showed that the company had been incurring cash losses with
declining market share and the long term investment may not fetch more than ₹ 55,000.
b) On 1st December, 2021 Ziva Limited had made an investment of ₹ 5,00,000 in 4,000 Equity
Shares of Garry Limited at a price of ₹ 125 per share with an intention to hold it for not
more than six months. In the first week of March, 2022, Garry Limited suffered heavy loss
due to an earthquake; the loss was not covered by an insurance policy. On 31st March,2022,
the shares of Garry Ltd. were traded at a price of ₹ 80 per share on the Stock Exchange.
How would you deal with the above investments in the books of Ziva Limited for the year
ended 31st March,2022 as per the provisions of AS 13 ‘Accounting for Investments’?

Solution
(a) Investments classified as long term investments should be carried in financial statements
at cost. However, provision for diminution should be made to recognize a decline, other
than temporary, in the value of the investments, such reduction being determined and
made for each investment individually.
On this basis, the facts of the given case, it would be appropriate to reduce the carrying
value of Long-term investments to ₹ 55,000 in the financial statements for the year ended
31st March, 2022.Thus the unquoted investment in the shares of Rachel Ltd. will be valued
at ₹ 55,000. The provision for diminution amounting ₹ 45,000 should be made to reduce
the carrying amount of the investments.

(b) Equity Shares in Garry Ltd. will be considered as current investment as intended to hold
for not more than six months. As per AS 13, “Accounting for Investments”, carrying
amount for current investments is the lower of cost and fair value. In respect of current
Investments for which as active market exists, market value generally provides the best
evidence of fair value.
Since on 31st March,2022, the shares of Garry Limited were trading at a price of ₹ 80 per
share on the stock exchange, the equity shares of Garry Ltd. should be carried in the
financial statements at realizable value i.e. at ₹ 3,20,000 (4,000 shares @ ₹ 80 per share).
The reduction of ₹ 1,80,000 in carrying value of current investment will be charged to the
statement of profit and loss for the year ended 31st March,2022.

Question 11 (ICAI Study Material)

Whether the accounting treatment ‘at cost’ under the head ‘Long Term Investments’ without
providing for any dimunition 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.

Solution
The accounting treatment ‘at cost’ under the head ‘Long Term Investments’ in the financial
statements of the company without providing for dimunition 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.

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