## AS 13 — Investments in Debentures: Ex-Interest (Excluding Interest) Purchase
### What Does 'Ex-Interest' Mean?
Debentures pay interest on fixed interest due dates (e.g., 30 September and 31 March for a 12% debenture). When you buy debentures between two interest due dates, the seller has held them for part of that period.
Ex-interest purchase = you pay the investment price separately from the accrued interest.
The buyer therefore pays:
1. Investment price (face value or market price of the debenture itself)
2. Accrued interest from the last interest due date to the purchase date
These two amounts are recorded separately in the books.
### Why Separate the Accrued Interest?
The buyer will receive the full next interest payment (covering the period the seller held as well). The accrued interest paid at purchase effectively "buys back" the portion belonging to the previous holder — it is an advance, not an investment cost. When the full interest is received, the advance is recovered and only the buyer's actual holding period income remains as income.
### Key Rules
- Interest is always calculated on Face Value (never on cost or market price)
- Accrued interest paid at purchase → Interest Expense A/c (Dr)
- Full interest received → Interest Income A/c (Cr)
- Net P&L impact = Interest Income − Interest Expense = Interest for actual holding period only
### Timeline Diagram
```
01 Apr 01 Jun (Purchase) 30 Sep (Int Due) 31 Mar (Int Due)
|----2 months----|--------4 months--------|------6 months----|
(FY Start) (Buyer pays 2m interest) (Buyer earns net 4m)(Buyer earns 6m)
```
### Journal Entries Summary
At Purchase (01/06/Y1):
```
Investment in 12% Debentures A/c Dr 10,00,000
Interest Expense A/c Dr 20,000
To Cash/Bank A/c 10,20,000
```
(Accrued interest = 10,000 × ₹100 × 12% × 2/12 = ₹20,000)
At First Interest Receipt (30/09/Y1):
```
Cash/Bank A/c Dr 60,000
To Interest Income A/c 60,000
```
(Full 6 months = 10,000 × ₹100 × 12% × 6/12 = ₹60,000)
Net income in P&L:
- Interest Income: ₹60,000
- Less Interest Expense: ₹20,000
- Net = ₹40,000 (= 4 months of actual ownership)
At Second Interest Receipt (31/03/Y2):
```
Cash/Bank A/c Dr 60,000
To Interest Income A/c 60,000
```
(Full 6 months — buyer holds all 6 months, no netting needed)