## Profit/Loss on Sale of Debt Investments: Weighted Average vs FIFO

### Core Concept

When you hold multiple lots of the same debenture purchased at different prices, you must decide which cost to use when calculating profit/loss on a partial sale. AS 13 permits two methods:

Method	How it works
Weighted Average	Blend all purchase costs into one average cost per unit
FIFO	Assume the earliest-purchased units are sold first

> The method chosen must be applied consistently.

### Ex-Interest Price

Debentures are often quoted Ex-Interest (Ex-Int) — meaning the quoted price excludes accrued interest. The interest component is tracked separately and is not part of the cost of investment.

### Step-by-Step: Weighted Average Method

1. List every lot: number of debentures × purchase price = total cost per lot.

2. Sum all lots: Total Cost ÷ Total Debentures = Average Cost per Debenture.

3. For sale: Carrying Amount = Debentures Sold × Average Cost.

4. Profit/Loss = Net Sale Proceeds − Carrying Amount.

### Step-by-Step: FIFO Method

1. Assume the oldest lot is sold first.

2. If the sale quantity exceeds the first lot, move to the second lot for the remainder.

3. Cost of Debentures Sold = cost of specific lots exhausted in order.

4. Profit/Loss = Net Sale Proceeds − Cost (FIFO).

### Journal Entry on Sale

```

Bank A/c (CIB) Dr. [Net Sale Proceeds]

To Investment A/c [Carrying Amount of Debentures Sold]

To Profit & Loss A/c [Profit, if any]

OR, if a loss:

Bank A/c (CIB) Dr. [Net Sale Proceeds]

Profit & Loss A/c Dr. [Loss on sale]

To Investment A/c [Carrying Amount]

```

Worked example

### Example 1

Example (WA vs FIFO – Sale of Debentures)

Purchase 1: 10,000 Debs @ ₹101 (Ex-Int)

Purchase 2: 5,000 Debs @ ₹105 (Ex-Int)

Sale: 12,000 Debs @ ₹109 (Ex-Int)

Case A – Weighted Average:

Lot	Debs	Rate	Amount
P1	10,000	101	10,10,000
P2	5,000	105	5,25,000
Total	15,000	—	15,35,000

Avg Cost per Deb = 15,35,000 ÷ 15,000 = ₹102.33

Selling Price (12,000 × 109) = ₹13,08,000

Carrying Amount (12,000 × 102.33) = ₹12,27,960

Profit = ₹80,040

Journal:

```

Bank A/c Dr. 13,08,000

To Investment 12,27,960

To P&L A/c 80,040

```

Case B – FIFO:

Sell oldest 10,000 first (@ 101), then 2,000 from P2 (@ 105):

Carrying Amount = (10,000 × 101) + (2,000 × 105) = 10,10,000 + 2,10,000 = ₹12,20,000

Selling Price = ₹13,08,000

Profit = ₹88,000

Journal:

```

Bank A/c Dr. 13,08,000

To Investment 12,20,000

To P&L A/c 88,000

```

⚠️ Common exam mistakes

Including accrued interest in the 'cost' of investment — interest paid on purchase goes to the Interest column, not Cost.
Switching between WA and FIFO across periods — the method must be consistent.
Using face value (NV) instead of purchase price for cost allocation.
Under FIFO, applying the wrong lot cost to the remaining units after the first lot is exhausted.

Bare-Act text Paragraph 25 · AS 13 – Accounting for Investments · click to expand

On disposal of an investment, the difference between the carrying amount and the disposal proceeds, net of expenses, is recognised in the profit and loss statement. When disposing of a part of the holding of a particular investment, the carrying amount to be allocated to that part is to be determined on the basis of the average carrying amount of the total holding of the investment.

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Profit/Loss on Sale of Debentures – Weighted Average vs FIFO

Worked example

⚠️ Common exam mistakes