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While preparing final reports, it is important to remember that transactions associated with
investment activities can result in accruals. Acquisition and disposal of financial assets
can take place at any time and the payment of interest and dividends may not always
match the date at which the books of accounts are closed. Therefore, when an investor
is closing the books of accounts, at the end of the accounting period, it is important
to establish accrued income (interest/dividend) for their recognition in the financial
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statements. For instance, a company that purchased a bond just two months before the
closing date of its books of accounts will be required to calculate accrued interest for
income recognition even if the payment date is not yet.
Exercise 4.4
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The following are the transactions of Matata Ltd for investment activities for the
financial year ended December 2021:
1. On 1 March 2021, the company acquired 10,000 preference shares of Wadau Ltd
st
for TZS 19,200,000 as part of its diversification strategy. The face value of each
share is TZS 2,000 and the coupon rate 8 per cent, paid annually.
2. On 1 May 2021, Matata Ltd sold a 10 per cent corporate bond of TZS. 50,000,000
st
to Malingumu Ltd at 90 ex-interests. Matata Ltd purchased these stocks on 31
st
Dec. 2020 at TZS 42,500,000. Interest is received semi-annually every year that
is 30 June and 31 December.
st
th
3. On 1 August 2021, the company purchased TZS 20,000,000, 12 per cent treasury
st
bonds at 90 cum interest. Interest is payable semi-annually on 30 June and 31
th
st
December.
Required:
(a) Determine accrued interest income from investment activities that should appear
in the statement of financial position.
(b) Prepare investment account to determine investment income and investment cost
for reporting in the financial statements.
Activity 4.3
Babayo inherited some money and needs to decide how to invest it wisely. He is
looking at two main options: buying stocks or investing in bonds. Babayo wants to
understand how each option can earn him money, and he heard terms like nominal
value and coupon rate when it comes to bonds, and he knows these are important in
figuring out how much he can make. Babayo also wants to make sure his investments
are balanced to reduce risk.
Required: Advise Babayo on important issues he should consider to balance his
investment in stocks and bonds
Student’s Book Form Five
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