## Cum-Interest Purchase of Debentures (AS 13)
### Core Concept
When a debenture is quoted cum-interest, the market price already includes interest accrued since the last coupon date. Under AS 13, the buyer must split the total price paid into two distinct components:
| Component | Treatment |
|---|---|
| Pure investment cost | Debit Investment in Debentures A/c |
| Accrued interest embedded in price | Debit Interest Expense A/c |
This split is essential because the accrued interest is not the cost of the asset — it is interest income belonging to the seller, which the buyer will recover at the next coupon date.
### Step-by-Step Formula
Step 1 – Compute accrued interest (embedded in cum-interest price):
$$\text{Accrued Interest} = \text{Face Value} \times \text{Rate\%} \times \frac{\text{Months since last coupon date}}{12}$$
Step 2 – Arrive at investment cost:
$$\text{Cost of Investment} = \text{Total Price Paid} - \text{Accrued Interest}$$
### Journal Entries
On purchase date (cum-interest):
```
Dr. Investment in 12% Debentures A/c [Cost only]
Dr. Interest Expense A/c [Accrued interest for N months]
Cr. Bank A/c [Total price paid]
```
On next interest due date (full coupon received):
```
Dr. Bank A/c [Full half-year / full-year interest]
Cr. Interest Income A/c [Full coupon amount]
```
P&L Impact: Interest Expense debit (purchase) is set off against Interest Income credit (coupon receipt). The net interest income recognised = coupon received minus accrued interest paid at purchase — which equals interest earned only for the holding period. This is the correct accrual-basis outcome.
At year-end (interest accrued but not yet received):
```
Dr. Bank / Accrued Interest A/c
Cr. Interest Income A/c
```
### Ledger Structure for Debenture Investment Account
The ledger carries two columns: Nominal Value and Amount (cost). The Interest column is kept separately in the Interest Expense / Income accounts — interest amounts never flow through the face value column of the Investment account itself.