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INTRODUCTION2
QUESTION ONE
Effective interest
rate.3
Amortisation schedule3
Journal entries for corporate bond3-4
QUESTION TWO.5
QUESTION THREE
GLOSSARY OF TERMS7
BIBLIOGRAPHY..8
1
INTRODUCTION
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
JOURNAL ENTRIES
DEBIT CREDIT
01 JANUARY 2012
Bank 98 500
31 DECEMBER 2012
Bank 12 000
3
Recording of interest income
31 DECEMBER 2013
Bank 12 000
31 DECEMBER 2014
Bank 12000
4
Bank 10000
0
QUESTION 2
5
What is a finance lease?
1
1
r
(1+ ) mn
m
rm
1
1
0,10 20
(1+ )
2
0,10/2
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
6
QUESTION 3
Calculations
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
Rent received in advance (55 000-51 667) 3 333
Operating lease rental received
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
7
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.
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.
8
REFERENCES