What is Compound Interest?

What is ‘Compound Interest’

Compound interest is interest calculated on the initial principal and also on the accumulated interest of previous periods of a deposit or loan. Compound interest can be thought of as “interest on interest,” and will make a deposit or loan grow at a faster rate than simple interest, which is interest calculated only on the principal amount. The rate at which compound interest accrues depends on the frequency of compounding; the higher the number of compounding periods, the greater the compound interest. Thus, the amount of compound interest accrued on \$100 compounded at 10% annually will be lower than that on \$100 compounded at 5% semi-annually over the same time period. Compound interest is also known as compounding.

Question:

A bank offers 5% compound interest calculated on half-yearly basis. A customer deposits Rs. 1600 each on 1st January and 1st July of a year. At the end of the year, the amount he would have gained by way of interest is:

A. Rs. 120

B. Rs. 121

C. Rs. 122

D. Rs. 123

What is Sum Of The Years ?

What are ‘Sum-Of-The-Years’ Digits ‘

An accelerated method for calculating an asset’s depreciation. This method takes the asset’s expected life and adds together the digits for each year. So if the asset was expected to last for five years, the sum of the years’ digits would be obtained by adding: 5 + 4 + 3 + 2 + 1 to get a total of 15. Each digit is then divided by this sum to determine the percentage by which the asset should be depreciated each year, starting with the highest number in year 1.

BREAKING DOWN ‘Sum-Of-The-Years’ Digits ‘

It makes sense to use an accelerated depreciation method such as the SYR method when an asset will lose most of its value toward the beginning of its useful life – as is the case with automobiles, for example.
In the five year example above, the SYD method would yield the following depreciation schedule:

Year 1: 5/15 = 33%

Year 2: 4/15 = 27%

Year 3: 3/15 = 20%

Year 4: 2/15 = 13%

Year 5: 1/15 = 7%

The percentages for each year should add up to 100%.

Question:

Original cost =Rs.1,26,000: Salvage value = nil: Useful life = 6 years.Depreciation for the 1st year under sum of years digits method will be

a. Rs.6,000

b. Rs.12,000

c. Rs.18,000

d. Rs.36,000

What is Called-up value?

What is share?

The capital of a company is divided into shares. Each share forms a unit of ownership of a company and is offered for sale so as to raise capital for the company.

In financial markets, a share is a unit of account for various investments. It often means the stock of a corporation, but is also used for collective investments such as mutual funds, limited partnerships, and real estate investment trusts.

Corporations issue shares which are offered for sale to raise share capital. The owner of shares in the corporation is a shareholder (or stockholder) of the corporation. A share is an indivisible unit of capital, expressing the ownership relationship between the company and the shareholder. The denominated value of a share is its face value, and the total of the face value of issued shares represent the capital of a company, which may not reflect the market value of those shares.

The income received from the ownership of shares is a dividend. The process of purchasing and selling shares often involves going through a stockbroker as a middle man.

Called-up value:

The value of the issued shares that have remained fully or partially unpaid, and whose holders have now been called upon to pay the balance.

Depending on the jurisdiction and the business in question, some companies may issue shares to investors with the understanding they will be paid at a later date. This allows for more flexible investment terms and may entice investors to contribute more share capital than if they had to provide funds up front. The amount of share capital owed by shareholders, but has not yet been paid, is referred to as called-up capital.

Question:

A company forfeited 2,000 shares of Rs.10 each (which were issued at par) held by Mr. John for non-payment of allotment money of Rs.4 per share. The called-up value per share was Rs.9. On forfeiture,the amount debited to share capital will be

1. Rs.10,000
2. Rs.8,000
3. Rs.2,000
4. Rs.18,000

Explanation:

On forfeiture, the share capital account is always with the called value of share

(2,000 x 9) Share Capital A/c Dr. 18,000

(2,000 x 5) To Share forfeiture 10,000

(2,000 x 4) To Calls – in- arrears 8,000