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For illustration purpose, journal entries for recording purchases of ordinary shares at
cum – div price are shown as follows:

Dr Investment Account (normal price in capital column) xxx
Dr Investment Account (accrued dividend in income column xxx
Cr Bank Account (Total amount paid) xxx
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Note that, in practice, dividend/interest is usually paid to a person who holds the share/
debenture certificate. However, there is a date at which investors are required to register
with the issuer of shares/debenture for the distribution of the dividend/interest. Thus, if
the share/debenture is sold prior to the registration date, it will be quoted at cum-div price.
On the contrary, if it is sold after registration date, it will be quoted at ex-div price. Thus,
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once someone has registered for dividend/interest distribution, the dividend/interest will
be paid to him/her regardless of whether he/she still holds the share/debenture certificate.

Ex-div price quotation

The ex-div quotation is the transaction price of ordinary shares which does not include the
dividend aspect accrued to the time of sale. The purchase price the buyer pays does not
include the dividend accrued to the time of the transaction. Unlike the cum-div quotation
transaction for ex-div, the accrued dividends are not deducted from the purchase price to
arrive at the capital price. However, when an investor has quoted the investment at the
ex-div price, he/she is required to pay the seller the accrued dividend to the transaction
date, in addition to the quoted price. In accounting records, the investor will record the
quoted price together with the transaction costs (for example brokerage fees and taxes)
in the capital column and the accrued aspect of the dividend in the income column.
The following is an illustration of journal entries to record ordinary shares purchases
at ex-div price:

Dr Investment Account (normal price in capital column) xxx
Dr Investment Account (accrued dividend in income column xxx
Cr. Bank Account (total amount paid) xxx

Purchase and sale of fixed interest securities
The purchase and sale of fixed income financial assets are usually done through brokers,
as it is for ordinary shares. The price of any financial asset represents the present value
of the cash flow expected from an asset. To calculate the present value of an asset it is
necessary to establish the cash flows and the discounting rate which is the required return
of an asset. The cash flows of a bond, for instance, are the coupon interest payments
and the principal amount that will be repaid at maturity. The formula for calculating the
price of a bond is as follows:

Student’s Book Form Five
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ACCOUNTANCY_DUMMY_23 JUNE.indd 110 23/06/2024 17:35