Download Cum-Interest (Dividend) price

Chapter – 4
Investment Accounts
Chapter outcomes:
1.
2.
3.
4.
5.
6.
7.
Meaning of investment;
Types of investment;
Investment transactions;
Cum-Interest (Dividend) price;
Ex-interest (Dividend) price;
Distinction between cum-interest and ex-interest ;
Practical exercises;
Meaning of investment
Any kind of transferable certificate of ownership or indebtedness
is called a ‘security’.
Investment is the amount of money invested in various securities.
Investment may be made in the securities of government, semigovernment and corporate sectors.
Examples,
Central bank of Oman gold bond;
Bonds and debentures issued by the local authority;
Shares and debentures issued by joint stock companies;
Bonds issued by the government
Types of investments
The business may invest either in current asset or fixed asset. If
the investments are made permanently to increase the earning
capacity of the business, then they are considered as fixed assets.
Usually the investments in fixed assets are held for a longer
period. If the investments are made temporarily, then they are
considered as current assets.
Investments are made in various types of securities. Based on the
periodicity of income of the securities, the securities are classified
into two types:
1. Fixed income securities;
2. Variable income securities
Investment transactions
Investment transactions refer to the purchase and sale of various
securities. Bankers and brokers held in the process of investment
transactions and they charge a nominal amount as commission
or brokerage for their services.
Investment may be bought and sold at either nominal value or
market value. Nominal value refers to the face value of the
security.
Market value is the price at which it is worth in the market. The
market price is influenced by various factors such as nature of
income, regularity of income, rate of income, safety, political
scene, demand, future prospects, etc. The market value of
invests may be more or less than the nominal value
At the time of investment transactions, if the value of
investments is equal to nominal value, then it is said to be traded
“AT PAR”.
If the value of the investments is more than the nominal value,
then it is said to be traded “AT PREMIUM”.
If the value of the investments is less than the nominal value,
then it is said to be traded “AT DISCOUNT”.
The income from fixed income bearing securities is received
periodically on fixed dates. If any security is purchased on a day
other than the date of declaration of interest by the company or
the government, then the interest to be received should be
settled between buyer or seller carefully because the company
or the government pays interest or income on the security.
Cum-interest (dividend) price
An investment transaction is said to be carried out at cuminterest price, when securities are purchased on any date other
than the date of declaration of interest and it is agreed that the
buyer holds the right to receive the interest income for the full
period.
Thus, the seller charges the price which includes the normal
price of the securities plus the interest for the period for which
he was holding the securities.
Ex-interest (dividend) price
An investment transaction is said to be carried out at ex-interest
price, when securities are purchased on any date other than the
date of declaration of interest and the seller holds the right to
receive the interest income for the full period.
Thus, the seller charges the price which is less than the the
normal price , i.e., the real price of the securities minus the
interest for the period for which he was not holding the
securities from the date of sale to the date of declaration of next
interest.
Distinction between cum-interest and ex-interest
Following are the points of distinction between the cum-interest price
and ex-interest price of the investment transactions;
1. Price paid: The price paid by the buyer in case of cum-interest
transaction is more than the real price of the securities; whereas
the price paid by the buyer in case of ex-interest is less than the
real price of the securities;
2. Calculation of real price – in case of cum-interest transactions, the
real price of the security is arrived at by deducting the interest or
dividend for the expired period from the actual price paid or cuminterest price. Whereas in the case of ex-interest transaction, the
real price of the security is arrived at by adding the interest or
dividend of the future period.
3. 3. Receipt of full interest or dividend: In case of cum-interest price,
the interest for the full period is received by the buyer, whereas in
case of ex-interest, the interest for the full period is received by
the seller
Accounting entries
In the books of the buyer:
1. For the purchase of securities at cum-interest Price:
Investment/Securities Account Dr. XXXX
Interest/Dividend Account
Dr. XXXX
Bank/Cash Account
Cr.
XXXX
(Being the purchase of securities at cum-interest price)
2. Purchase of securities at ex-interest price:
Investment/Securities Account Dr. XXXX
Interest/Dividend Account
Cr.
XXXX
Bank/Cash Account
Cr.
XXXX
(Being the purchase of securities at ex-interest price)
Accounting entries
In the books of the buyer:
3. For interest or dividend received:
Bank Account
Dr. XXXX
Interest or dividend Cr.
XXXX
(Being the interest received)
4. For interest accrued:
Accrued interest Account Dr. XXXX
Interest account
Cr.
XXXX
(Being the interest accrued)
5. For closing the interest or dividend account:
Interest or dividend account Dr. XXXX
Profit and loss account
Cr.
XXXX
(Being the interest or dividend transferred to P&L account)
Accounting entries
In the books of the seller:
1. For the sale of securities at cum-interest or exs-interest:
Bank Account
Dr. XXXX
Investment/securities Cr.
XXXX
Interest or dividend Cr.
XXXX
(Being the sale of securities)
4. For interest or dividend received:
Bank Account
Dr. XXXX
Interest account or dividend account Cr.
XXXX
(Being the interest or dividend received)
5. For closing the interest or dividend account:
Interest or dividend account Dr. XXXX
Profit and loss account
Cr.
XXXX
(Being the interest or dividend transferred to P&L account)