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# DAMELIN BRAAMFONTEIN CAMPUS| GROUP 1

## PROFFE ANATHI LUKWE

SOR 201500338 BCOM
ELVIS ACCOUNTING 3RD YEAR
INDEX PAGE

INTRODUCTION2

QUESTION ONE

Effective interest
rate.3
Amortisation schedule3
Journal entries for corporate bond3-4

QUESTION TWO.5

QUESTION THREE

## Calculation of rental income..6

Journal entries..6

GLOSSARY OF TERMS7

BIBLIOGRAPHY..8

1
INTRODUCTION

## What is a financial Instrument?

Financial instruments are assets that can be traded. They can also be seen as
packages of capital that may be traded. Most types of financial instruments provide
an efficient flow and transfer of capital all throughout the world's investors. These
assets can be cash, a contractual right to deliver or receive cash or another type of
financial instrument, or evidence of one's ownership of an entity.

2
QUESTION 1

FINANCIAL INSTRUMENTS

## a) Effective interest rate per annum for the bond

PV = 98500 (98 000+500)
FV = R100 000
PTM = R12 000
N = 3 years
EIR = 12,631%

## DATE Opening Effective Bank Closing

balance interest balance

=R100 00012%
=12 000

JOURNAL ENTRIES

DEBIT CREDIT

01 JANUARY 2012

Bank 98 500

31 DECEMBER 2012

Bank 12 000

## Interest income 12 442

3
Recording of interest income

acquired

31 DECEMBER 2013

Bank 12 000

acquired

31 DECEMBER 2014

Bank 12000

4
Bank 10000
0

QUESTION 2

## The above lease is a finance lease

5
What is a finance lease?

## A finance lease is a way of providing finance effectively a leasing company (the

lessor or owner) buys the asset for the user (usually called the hirer or thr lessee)
and rents it to them for an agreed period.

## Risk and rewards- lessee(carriers)

The lessee uses the asset for the greater of its economic life
Ownership maybe transferred to the lessee
The lessee may make substantial adjustment to the asset
The minimum lease payments (Present value) must almost be equal to the
present value/fair value of the asset

1
1
r
(1+ ) mn
m
rm

1
1
0,10 20
(1+ )
2
0,10/2

## What happens at the end of the lease?

What happens at the end of the primary finance lease period will vary and depends
on the actual agreement but the following are possible options;

The lessee sells the asset to a third party, acting on behalf of the lessor
The asset is returned to the lessor to be sold
The customer enters into a secondary lease period

When the asset is sold, the customer may be given a rebate of rentals which
equates to the majority of the sale proceeds (less the costs of disposal) as
agreed in the lease contract

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QUESTION 3

Calculations

## Year Amount including VAT Amount excluding VAT

(100/114)
2001 62 700 55 000
2002 55 860 49 000
2003 58 140 51 000
155 000/3
51 667

JOURNAL ENTRIES

DEBIT CREDIT
I JANUARY 2001
Vehicle; (Initial direct cost) 8550100/114 7500
Current tax receivable 1050
Bank 8550
Initial direct costs of operating lease
31 DECEMBER 2001
Bank 62 700
Rental income 51 667
Current tax payable; VAT (6270014/114) 7 700
Depreciation; Vehicle 52 500
Vehicle; Accumulated depreciation (600 000-0)/12 50 000
Vehicle; Initial direct cost 7500/3 2500
Depreciation of equipment; Two significant parts

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GLOSSARY OF TERMS

Financial instruments are assets that can be traded. They can also be seen as
packages of capital that may be traded. These assets can be cash, a contractual
right to deliver or receive cash or another type of financial instrument, or evidence of
one's ownership of an entity.

## A finance lease is a way of providing finance effectively a leasing company (the

lessor or owner) buys the asset for the user (usually called the hirer or lessee) and
rents it to them for an agreed period. A finance lease is defined in Statement of
Standard Accounting Practice 21 as a lease that transfers.

An operating lease is a lease whose term is short compared to the useful life of the
asset or piece of equipment (an airliner, a ship, etc.) being leased. An operating
lease is commonly used to acquire equipment on a relatively short-term basis.

Lease Written or implied contract by which an owner (the lessor) of a specific asset
(such as a parcel of land, building, equipment, or machinery) grants a second party
(the lessee) the right to its exclusive possession and use for a specific period and
under specified conditions, in return for specified periodic rental or lease payments.

Lessor a lessor, in its simplest expression, is someone who grants a lease. As such,
a lessor is the owner of an asset that is leased under an agreement to a lessee. The
lessee makes one-time or periodic payments to the lessor in return for the use of the
asset.

Lessee a lessee is the person who rents land or property from a lessor .The lessee
is also known as the "tenant", and must uphold specific obligations as defined in the
lease agreement and by law. The lease is a legally binding document, and if the
lessee violates its terms, he or she could be evicted.

## A corporate bond is a debt security issued by a corporation and sold to investors.

The backing for the bond is usually the payment ability of the company which is
typically money to be earned from future operations. In some cases, the company's
physical assets may be used as collateral for bonds.

## Amortisation is most commonly used to describe the routine decrease in value of

an intangible asset. A corresponding concept for tangible assets is known as
depreciation. The idea of amortisation and depreciation is that the cost of an asset is
spread over the period of time that it will be of use or its 'useful life'.

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REFERENCES

## DL KOLITZ, CL SERVICE 2014 EDITION LexisNexis GAAP: GRADED

QUESTIONS (ISBN: 978 0 409 05724 9)
(www.iasplus.com/CL Service 2013)
Accounting an introduction 2013 Van Vuren, Vorster, Myburg and Fouche.
LexisNexis