JJS 117

SECTION C

PERCENTAGES

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Learning outcomes
By the end of this section you
should be able to:

 Express a fraction in % and decimal form.

 Express a % in fraction and decimal form.

 Express a decimal in % and fraction form.

 Calculate the % of an amount.

 Calculate a % change.

 Demonstrate the ability to increase/decrease an amount with a %.

 Formulate and apply how to find discount, cash price and market price.

 Formulate and apply how to find profit, loss, selling price and cost price.

 Formulate and apply how to find the amount inclusive and exclusive of VAT.

 Formulate and apply how to find simple interest.

 Formulate and apply how to find the Present value and the Future value.

 Formulate and apply how to find compound interest.

 Formulate and apply how to find depreciation by using the straight – line
method.

 Formulate and apply how to find depreciation by using the reducing balance
method.

 Calculate the apportionment of damages.

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CONTENTS
1. PERCENTAGE ………………………………… 67– 77
1.1 INTRODUCTION ………………………………………… 67

1.2 CONVERSIONS OF FRACTIONS TO % …………….. 67 – 71

1.2.1 Common fractions to % …………………………………………………………….. 68

1.2.2 % to common fractions ……………………………………………………………… 68 – 69

1.2.3 % to decimal fraction ………………………………………………………………. 69 – 70

1.2.4 Decimal fraction to % ……………………………………………………………….. 70 – 71

1.3 USING % FOR MAKING COMPARISONS …………………………………………………. 71

1.4 FINDING % OF A GIVEN QUANTITY ……………………………………………………… 72

1.5 CALCULATE % INCREASE AND DECREASE …………………………………………………. 72 –73

1.6 FINDING % INCREASE AND DECREASE …………………………………………………… 73

1.7 INDING THE ORIGINAL AMOUNT …………………………………………………………… 74

1.8 CALCULATOR SKILS …………………………………………………………………………………… 74

1.9 ACTIVITY : REAL LIFE APPLICATIONS ………………………………………………………… 75 –77

2. VALUE ADDED TAX (VAT) ……………………………………………………… 78 –79

2.1 INTRODUCTION ………………………………………………………………………………………. 78

2.2 FINDING VAT INCLUSIVE …………………………………………………………………………. 78

2.3 FINDING VAT EXCLUSIVE …………………………………………………………………………, 79

2.4 ACTIVITY : REAL LIFE APPLICATIONS ……………………………………………………… 79

3. DISCOUNT ……………………………………………………………………… 80 – 81
3.1 INTRODUCTION ……………………………………………………………………………………… 80

3.2 HOW TO FIND DISCOUNT, DISCOUNT RATE, MARKET PRICE AND CASH PRICE 80 – 81

3.3 ACTIVITY : REAL LIFE APPLICATIONS ……………………………………………………… 81

4. PROFIT AND LOSS ………………………………………………………………. 82 – 83

4.1 INTRODUCTION ………………………………………………………………………………………… 82

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4.2 HOW TO FIND PROFIT, LOSS, SELLING PRICE AND COST PRICE …………………….82 – 83

4.3 ACTIVITY : REAL LIFE APPLICATIONS……………………………………………………………. 83

5. SIMPLE INTEREST …………………………………………………………….. 84 – 87

5.1 INTRODUCTION ……………………………………………………………………………………….. 84

5.2 CALCULATION OF SIMPLE INTEREST ……………………………………………………….. 84 – 86

5.3 CALCULATOR SKILLS ………………………………………………………………………………… 86

5.4 ACTIVITY : REAL LIFE APPLICATIONS ……………………………………………………… 86 – 87

6. COMPOUND INTEREST ………………………………………………………… 88 – 89

6.1 INTRODUCTION ………………………………………………………………………………………….. 88

6.2 CALCULATION OF COMPOUND INTEREST ……………………………………………………. 88

6.2.1 CALCULATION WITHOUT FORMULA ………………………………………………… 88

6.2.2 CALCULATION WITH FORMULA ………………………………………………………. 88

6.3 ACTIVITY : REAL LIFE APPLICATIONS …………………………………………….......... 89

7. DEPRECIATION …………………………………………………………………..90 – 95
7.1 INTRODUCTION …………………………………………………………………………………………. 90

7.2 STRAIGHT LINE METHOD ………………………………………………………………………………..91– 92

7.2.1 Writing off a fixed amount …………………………………………………………. 91 – 92

7.2.2 Writing off a fixed % …………………………………………………………………… 92

7.3 REDUCING BALANCE METHOD …………………………………………………………………… 93 – 94

7.3.1 Without formula …………………………………………………………………………….. 93 – 94

7.3.2 With formula ………………………………………………………………………………… 94

7.4 ACTIVITY : REAL LIFE APPLICATIONS ……………………………………………...... 95

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1. PERCENTAGE
1.1 INTRODUCTION

Percentages are used daily in real life situations.

For example, whenever we read newspapers, listen to the radio, or watch television,
we come across information such as:

 “VAT in South Africa is levied at a rate of 14%.”

 “Standard Bank is now offering home loans at 12,5% p.a.”
 “28% of the population is HIV positive”

As a law practioner, you will need a knowledge of the calculation of percentage

when calculating VAT on services rendered, for the apportionment of damages, for
the calculation of interest, for determining profit, loss and discount and dividing a
client’s estate among heirs.

A percentage is a common fraction having a denominator of 100

The symbol % means per hundred, therefore we give the number preceding it a
denominator of 100

23
e.g . written as 23% is read as “23 percent”
100

5
5 % is read as
100

1
1
% is written as 2
2 100

1.2. CONVERSIONS FROM FRACTIONS TO PERCENTAGE

Consider the following sets of statements and compare how identical information is
given in each set of A and B statements. Which has the greatest clarity?

3
A. The diary is now full. B. The diary is 37,5% full
8

19
A. JJS 117 test result = B. JJS 117 test result = 61,3%
31

Numerical information which is communicated in percentage has greater clarity.

Therefore fractions are often converted to percentages.

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1.2.1 CONVERTING COMMON FRACTIONS TO PERCENTAGES

A. Pen and Paper Method

To convert a common fraction, the denominator of which is not

100, to a percentage multiply the fraction by 100%.

100
Note : 100% actually means a multiplication by 100
. However, we actually
100
multiply by 1
and the 100 from the denominator is recorded in the % symbol of the
answer. This is why it is vitally important to write the % symbol clearly beside the
number.

Examples:

4 31
1. Convert to a percentage 2. Convert to a percentage
5 25

31 31 100
4 4 100 × 100% = x %
Solution: × 100% × % = 80% Solution: 25 25 1
5 5 1
= 124%

1.2.2 CONVERTING PERCENTAGES TO COMMON FRACTIONS

Write the percentage in fraction form and simplify (÷ 100)

Examples:

1. Convert 15% to a common fraction

15  5 3
Solution: 15%  5

100 20

2. Convert 125% to a common fraction

125 5
Solution: =
100 4

3. Convert 12 12 % to a common fraction

12 21 25 1 25 1
Solution: = x  
100 2 100 200 8

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The following fractions are frequently used as percentages and therefore need to be
known very well.

SIMPLIFIED
FRACTION PERCENTAGE
FRACTION

100
1 100%
100

75 3
75%
100 4

.
66,6 2 .

3 66,6%
100

50 1
50%
100 2

.
33,3 1 .

3 33,3%
100

25 1
25%
100 4

12,5 1
12,5%
100 8

10 1
10%
100 10

5 1
5%
100 20

1 1
1%
100 100

1.2.3 CONVERTING PERCENTAGES TO DECIMAL FRACTIONS

To convert a percentage to a decimal fraction write the numerator with a

denominator 100.

Simplify by moving the decimal comma 2 spaces to the left to divide by 100.
(100 has two zeros).

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Examples:

1. Convert 57% to a decimal fraction 3. Convert 0,09% to a decimal fraction

57 0,09
Solution: 57% = = 0,57 Solution: = 0,0009
100 100

2. Convert 13,7 % to a decimal fraction

13,7
Solution: 13,7% = = 0,137
100

The following percentages are frequently used in decimal form in calculations and
need to be memorized.

PERCENTAGE DECIMAL FORM

75% 0,75

50% 0,5

. .
33,3% 0,33 3

25% 0,25

12,5% 0,125

10% 0,10

5% 0,05

1% 0,01

1.2.4 CONVERTING DECIMAL FRACTIONS TO PERCENTAGES

To convert a decimal fraction to a percentage multiply by 100%

100
This actually means multiplying by 100
. Therefore multiply the number by 100 by
moving the decimal comma 2 spaces to the right (100 has 2 zeros)

Be careful to remember to write the denominator of 100 as the % symbol in your

answer.

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Examples:

1. Convert 1,38 to a percentage

1,38 100
Solution: × = 138% ( multiply by 100%)
1 100

2. Convert 0,6 to a percentage 4. Convert 0,09 to a percentage

0,6 100 0,09 100

Solution: x = 60% Solution: x = 9%
1 100 1 100

3. Convert 0,125 to a percentage

Solution: 0,125 x 100% = 12,5%

1.3 USING PERCENTAGES FOR MAKING COMPARISONS

Percentages communicate clearly the difference between number values

Example:

17 21
Which is greater or ?
20 25

17 17 1005
Solution: x % 17 x 5 % 85%
20 20 1

21 21 100 4
And x % 21 x 4 % 84%
25 25 1

17
Thus is greater
20

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1.4 FINDING A PERCETAGE OF A GIVEN QUANTITY

If you are asked to calculate a percentage of a quantity, you simply write the
percentage as a fraction and multiply by the quantity.

Example:

1. As a legal assistant your salary is R 12 800 per month. You receive an increase of
5 12 %. Calculate your increase.

5 12 12800 11 1 12 800
5 12 % of 12 800 = × = x x
100 1 2 100 1
Solution: = R 704
5,5
OR x 12 800 = R704
100

1.5 CALCULATE PERCENTAGE INCREASE AND DECREASE

There are two ways in which this can be calculated. Note the difference in the
following examples:

Examples:

1. The yearly subscription to a legal journal was R800 for 2008. How much will the
subscription be if it cost 10% more in 2009?

This calculation can be done in TWO different ways

(a) Increase R800 by 10%.

Solution: 10% of R800

10 R800
R80
100 1

New price is : R800 + R80 = R880

OR (b) Increase R800 by 10%

Solution:

To increase by 10% we have to find the full

percentage value after the increase

110 R 800
= × = R 880
100% + 10%=110% ; Thus 110% of R800 100 1

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2. The value of a car decreased by 30% after being in a collision. The original value
was R120 000. What was the value after the collision?

This calculation can be done in TWO different ways

(a) Decrease 120 000 by 30%.

Solution: 30% of 120 000

30
 120 000  R36 000
100

Therefore R 120 000 – R 36 000 = R84 000

OR b. To decrease by 30% we have to find the end percentage value

100% – 30% = 70% Solution: 70% of 120 000

70 120 000
   R 84 000
100 1

1.6 FINDING PERCENTAGE INCREASE AND DECREASE

NOTE: The calculation to find the percentage increase or decrease of an amount is as

follows:

bigger value smaller value

% increase or decrease
original value(appearing first)

Example:

1. University fees increased from R5000 to R5800.

What is the percentage increase?

Solution: Increase = R5800 – R5000 = R800

800
% increase = 100%  16%
5000

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1.7 FINDING AN ORIGINAL AMOUNT

NOTE: The calculation to find the original amount is as follows:

100 new amount

x = the original amount
new percentage 1

Example:

1. After a pay increase of 10%, a junior clerk’s salary is R8 800 per month.

What was the salary before the increase?

Solution:

Original income = 100%

Increase percentage income = 100% + 10%

= 110%

100
xR 8800 R8000
110

The salary was R8 000

1.8 CALCULATOR SKILLS

Instead of multiplying by 100 to get percentage, some calculators have a % key. For
most of the scientific calculators this key is activated in 2nd function.

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1.9 ACTIVITY : REAL LIFE APPLICATIONS

1. In terms of the Transfer Duty Act 40 of 1949 as amended, the
transfer of ownership on immovable property is subject to transfer
duty on a sliding scale (as tabled below) when acquired.
Transfer Duty Rates: 2007 / 2008

PROPERTY VALUE RATE

R 0 - R 500 000 0% of the value

R 500 001 – R 1 000 000 5% on the value above R 500 000

R 1 000 001 and above R25 000 + 8% of the value exceeding R 1 000 000

a) If X bought a house for R 850 000, calculate the transfer duty payable.
b) If Y bought a house for R 1 250 000, calculate the transfer duty payable.

2. If an employee has been sick for 7 days and worked for 145 days, what is the percentage
of days worked?

3. If three children inherit R25 000, R45 000 and R100 000 respectively from their parent’s
estate. Calculate the percentage of the estate that each child will receive.

1
4. Write in ascending order : 0,375 ; 30% and .(Use %)
3

5. If Sarah received 45% of her mother’s estate of R 880 000. What fraction of the estate
did she receive?

6. You need 75% to pass your JJS 113 exam. Calculate the marks that you have to obtain in
the exam, if the Exam paper totals 120 marks.

7. A lawyer won 15 court cases and he lost 5. What percentage cases did he lose?

8. An attorney raises his consultation fees from R 1000 per hour to R 1 200 per hour. With
what percentage did he increase his fees?

9. A Getz owned and driven by Paul, collides with a Tazz, owned and driven by Patsy. No
one is injured in the accident. The Getz could not be repaired. The salvage value
(amount recovered from selling parts and scrap metal) of the Getz is R 10 000. Before
the accident the market value of the Getz was R 60 000. There were damages to the
amount of R20 000 to the Tazz. The court found that both drivers were negligent. Paul
was found to be 30 % negligent and Patsy 70% negligent. Which driver should pay
damages to which owner and what should the amount be?

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10. Lisa’s car collides with Sipho’s car at an intersection. The damage to Lisa’s car is R 35
000 and to Sipho’s car R 15 000. Lisa was found to be 45% negligent and Sipho was
found to be 25% negligent. Calculate the amount damage paid by each driver.

11. You are one of 15 partners in the firm CDS Attorneys. There are three categories of
partners: category one ( 5 partners), category two (seven partners) and category three
(3 partners).Partners share the profit of the firm as follows: Category one (40%) ;
category two (35%); category three(25%). Partners in each category share the profits
equally. You are in category three. During the month of January 2009 the gross income
of the firm was R935 870. The total expenses amounted to R232 870.

a) What is the amount available for distribution among the partners?

(i) R 703 000

(ii) R 1 168 740

(iii) R 836 470

(iv) R 756 861

b) What is the total amount available for distribution among the partners of category 2.

(i) R 281 200

(ii) R 246 050

(iii) R 35 150

(iv) R 175 750

c) How much did you receive?

(i) R 82 016,67

(ii) R 62 957, 33

(iii) R 93 733,33

(iv) R 58 583,33

12. ABC manufacturers’ year end figures appear below.

Total Sales: R 1 000 000

Expenses: R 250 000

Tax: R 250 000

Profit: R 500 000

You are representing B, an employee at ABC manufacturers. Advise him as to which of

the following options would leave him with the greatest post – Tax income.

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(a) Monthly salary of R 10 000 of which he pays 40% tax

(b) Hourly wages of R 50. B works 8 hours a day, 5 days a

week, 50 weeks per year. Tax on wages amounts to
30%.

(c) As in (b), with overtime pay of R 200 per hour. B

works over time 5 hours per week, 30 weeks per year.
Tax on over time wages amounts to 60%.

(d) 10% of ABC’s turnover (gross income before any expenses are subtracted). The tax
rate will be 55%

(e) 20% of ABC’s post tax profits. The tax rate will be 30%.

13. Your firm charges R550 per hour for consultations. If they decide to increase this by
7,5%, what will the new charge be per hour?

14. A car was bought for R 62 350 and sold at a loss of 8%. What was the selling price?

15. Attorney C consulted 256 clients during April. That represents 63% of the consultation
time of his diary per month. What is the capacity of his diary regarding consultation
time?

16. If the rand appreciates (strengthens) from R 6,50 to R 6, 20 against the dollar,
determine the percentage increase.

17. If the rand depreciates from R 11,80 to R 12,40 against the pound, determine the
percentage decrease.

18. Philip is a sole practitioner. He takes home 20% of his annual net profit (profit after
expenses have been subtracted) a s a bonus. The net profit for 2008 amounted to
R 550 000. Calculate his bonus for 2008.

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2. VALUE ADDED TAX (VAT)

2.1 INTRODUCTION:

VAT is tax payable to the government on almost all

products and services. VAT is expressed as a
percentage of the selling price or the services
rendered and is currently charged at 14%. In other
words, if you pay R114 for an item or a service,
R14 would go to the government and R100 would
go to the retailer (person who sells the item) or
the person that renders the service.

NB!!!! Your clients will have to pay 14% VAT on all fees charged. The Value
Added Tax (VAT) system is one where you require a knowledge of percentages in
order to levy the correct amount of VAT.

2.2 FINDING THE AMOUNT INCLUSIVE OF VAT

There are two ways in which this can be calculated. Note the difference in the following
examples: (Also refer to 1.7)

Example:

1. As an attorney you want to send an account of R 2 500 for your service and include
14% VAT. Calculate the account inclusive of VAT.

This calculation can be done in TWO different ways

(a) Increase R2 500 by 14%.

Solution: 14% of R2 500

14
= × R 2 500 = R 350
100

Account is R2 500 + R 350 = R 2 850

OR (b) Increase R2 500 by 14%

Solution: To increase by 14% we have to find the full

percentage value after the increase

100% + 14%=114%

114
= × R 2500 = R 2 850
100

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2.3 FINDING THE AMOUNT EXCLUSIVE OF VAT

NOTE: The calculation to find the amount exclusive of VAT is as follows:

100% amount inclusiveof VAT

x
new percentage(100% +14% VAT = 114%) 1

 amountexclusiveof VAT

Examples:

1. If a fax machine cost a firm R 4 800 inclusive

of VAT.

(a) Calculate the amount exclusive of VAT.

(b) Calculate the amount of VAT paid.

Solution:

(a) Original amount (VAT exclusive) = 100%

Increase percentage VAT (inclusive amount) = 100% + 14% = 114%

100
xR 4800 R4 210,53
114

The amount exclusive of VAT is R 4 210,53

(b) VAT = R 4 800 – 4 210,53 = R 589,47

2.4 ACTIVITY : REAL LIFE APPLICATIONS

1. An attorney paid a total of R 528 (VAT included) for a meal for him and his client.
What was the cost of the meal before VAT was added?

2. You prepare a letter for a client and you spend 3 hours. Your rate is R 750 per hour.
Calculate the amount that you would charge your client (VAT inclusive.)

3. A firm wants to sell used office furniture. The book value of the furniture is R 2800.
The firm adds a profit margin of 20% to the book value. Calculate the selling price
inclusive of VAT.

4. If the turnover of a firm is R 135 000 per week (VAT inclusive). Calculate the VAT.

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3. DISCOUNT
3.1 INTRODUCTION

In some cases where clients pay cash for items or services, the price is reduced,
because opposed to credit purchases, less bookkeeping is required and the risk of bad
debt is nullified. This reduction in price is called discount.
The regular or full price is called the market price. The price after the discount has been
deducted, is called the cash price. Thus the difference between the market price and
the cash price, is the discount.

3.2 HOW TO FIND THE DISCOUNT, DISCOUNT RATE, CASH PRICE AND MARKET PRICE

Discount Rate or % Discount

A : Discount = × Market price
100

B. Cash price = Market price – discount

C. Market price = Cash price + Discount

D. Discount = Market price – Cash price

Discount
E. % Discount or Discount Rate = × 100
Market price

Examples:

1. A client owes an attorney R 2 450 and negotiates a discount of 5% for cash.

Calculate the cash price. (also see 1.7 ) This
calculation can be done in TWO different ways

(a) Decrease R 2 450 by 5% (R2450 = market price ; 5% is the discount rate)

Solution: 5% of R2 450

5
  2 450  R 122,50 (discount)
100

Therefore R 2 450 – R 122,50 = R 2 327,50 (cash price)

OR ( b) To decrease by 5% we have to find the end percentage value

Solution: 100%(MP) – 5%(Discount) = 95%(CP)

95
= × 2 450 = R 2 327,50
100

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2. Calculate the market price of a book that you bought for R 240 after a discount of
10% had been allowed .

Solution: Market price = 100% ; Cash price = 100% - 10% discount = 90%

100
× 240 = R 266,67
90

 Market Price = R 266,67

3. If the original price to write a legal letter on behalf of your client, was R 550, but
you only charged your client R 520, what is the percentage discount allowed?

Market price - Cash price = Discount

× 100
MarketPrice
Solution:
30
= × 100 = 5, 45%
550

3.3 ACTIVITY : REAL LIFE APPLICATIONS

1. Your partner bought a new printer for your offices at a discount of 12%. If the
market price was R 550. Calculate the cash price.

2. Mr A’s consultation bill at your firm, is R 3 450. He settled it at R 3 100.

Calculate the percentage discount awarded to Mr A.

3. What is the rate of discount when the market price of stationary for your
secretary is R 350 and the discount is R 55?

4. Find the market price of office furniture if you paid a cash price of R 21 300
after a discount of 8%.

5. A book company on the internet

advertised a discount of 7% for a
book of $ 40 if you bought the
book before the 30th of August. On
the 29th of August you decided to
buy the book. Calculate the
amount paid in rand.

(Exchange rate: 0,12878 dollar per rand)

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4. PROFIT AND LOSS

4.1 INTRODUCTION

Merchants are engaged in business to earn profit. To determine the profit, each
merchant must consider the cost of the goods and the selling price of the same goods.
The cost is the amount that the merchant pays for the goods. The selling price is the
amount that the merchant receives for selling the goods. The difference between the
selling prise and the cost price is called the profit. To earn profit, the merchant must
sell the goods at a higher price than the price at which he bought the same goods. If the
selling price is lower than the cost price, the goods are
sold at a loss.

As a legal practitioner your firm has to make a profit.

This will happen if your income from legal assistance to
clients, exceeds your expenses (rent, wages,
stationary, telephone etc.) If your expenses exceed
your income, your firm will make a loss.

4.2 HOW TO FIND THE PROFIT, LOSS, THE SELLING PRICE (SP) AND THE COST PRICE (CP)

Profit Rate
A : Profit = (or % Profit) × Cost price (CP)
100

B. Selling price (SP) = Cost price (CP) + Profit

C. Cost Price = Selling price (SP) – Profit

D. Profit = Selling price(SP) – Cost price(CP)

E. Loss = CP – SP

Profit
F. % Profit or Profit Rate = × 100
Cost price

Loss
G. % Loss or Loss Rate = × 100
Cost price

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Examples:

1. If an article is bought for R 260 and sold at a profit of 7%, what is the selling price?

This calculation can be done in TWO different ways

a) Increase R 260 by 7% (R260 = (CP) ; 7% is the profit rate)

Solution: 7% of R260

7
 × R 260 = R 18, 20(Profit)
100

Therefore R 260 + R 18,20 = R 278 ,20 (SP)

OR b) To increase R 260 by 7% we have to find the end percentage value

Solution: 100%(CP) + 7% (Profit Rate) = 107%(SP)

107
 × 260 = R 278, 20(SP)
100

2. If an article is sold for R200 at a loss of 5%, what is the cost price?

Solution: Cost price(CP) = 100% ; Selling price(SP) = 100% - 5%loss = 95%

100
 × 200 = R 210, 53
95

 Cost Price = R 210,53

3. If the profit on an article which cost R 560 is R60. Calculate the profit rate.

Profit
× 100
Cost Price
Solution:
60
= × 100 = 10, 71%
560

4.3 ACTIVITY : REAL LIFE APPLICATIONS

1. Calculate the selling price of a stereo digital clock radio if the cost price is
R 445 and the profit is 10 12 %.

2. Find the loss rate if the cost price is R 5 680 and the selling price is R 4 530.

3. Calculate the percentage profit of a firm if the income is R 457 560 and the
expenses are R 337 800?

4. If an article was sold for R 344, at a loss of 10%, what was the cost price?

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5. SIMPLE INTEREST
5.1 INTRODUCTION

Borrowing money is a necessary transaction for most people and businesses. The
borrower can use the money to do something that under other circumstances would
not be possible, whereas the lender charges interest and makes a profit on the money
lent. Whenever goods are bought on credit, the customer usually pays interest on the
unpaid balance. Interest serves to compensate for the time value of money as buying
power decreases over time or for assuming the risk of non-payment

The amount of money on which interest (I) is paid is called the principal amount
(initial amount) (P) or as used in this course as the present value ( Pv )
The amount of interest charged is a certain percentage of the principal amount. This
percentage is called the rate of interest per period (r).Whenever money is borrowed,
the borrower agrees to pay back the principal amount plus the interest within a
specified period of time (t). At the end of these periods, the money is worth the
original amount plus interest. This new value of the money is referred to as the Future
Value (FV).

NOTATION
 the present value = Pv
 the rate of interest = r/i
 the time = t/n
 future value = FV
 Interest = I

5.2 CALCULATION OF SIMPLE INTEREST

This relationship can be expressed by the following formula:

Pv × r × t
I = where I = Interest, Pv = present value , r = rate of interest
100
(%) and t = time (in years)

NB !!!!! Simple interest is calculated on the initial amount borrowed, lent or

invested (i.e. PV), no matter how many periods are involved. This implicates that the
interest is only computed once for the total period (t). Therefore the borrower or
investor will never pay or receive interest on interest like in compound interest. It is
assumed that the interest rate remains unchanged.

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The time (t) is always applied in years. Convert the time to years when necessary,
before the interest is calculated

t (interest period)
Denominator
Days 365

Weeks 52

Months 12

Quarterly 4

Biannually 2

Annually 1

Examples:

1 year
1 month = 12 40 = 8 year
40 days = 365 73
3 = 1 year
3 months = 12 73 = 1 year
73 days = 365
4 5
4 = 1 year
4 months = 12 3 10 weeks = 10 5
52 = 26 year
7 year
7 months = 12 26 weeks = 26 1
52 = 2 year

If you borrow money or invest money, it is important to realize that you will have to
repay (or will receive) the present value + interest (= FV which refers to the future
value) after the period of time.
A (final amount = future value) can also be calculated by the formula: FV = Pv ( 1 + r n )
where Pv = present value, r = the interest rate written as a decimal and n = the
period of investment in years(can also be indicated by t).

Example 1:
Amanda borrowed an amount of R50 000 for a period of 5 years at a simple
interest rate of 14% per annum.
a) What is the interest amount that she must pay?
b) What is the total amount that must be repaid by her?

Solution:
14
Pv = R50 000 : r = 14% and t = 5 ( r = 0,14 or 100 )

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a) I = Pv r t
50 000 × 14 × 5
I = (R50 000) ( 0,14) (5) or
100
= R35 000
b) Amount to be repaid = R50 000 + R35 000
= R85 000
OR
FV = Pv (1 + r n ) = Pv [ 1 + (0,14 x 5 ) ] = 50 000(1 + 0,7) = R 85 000

Example 2:
1
How much interest will an amount of R3 000 earn at the end of 2 years at 12 %
2
simple interest per annum ?
Solution:
Pv = R3 000 r = 12 21 % or 0,125 t= 2
I = Pv × r × t
= (R3 000) ( 0,125) (2) or (R3000 )( 12,5%)(2)
= R750

Example 3:
How much interest will an amount of R8 000 earn at the end of 6 months at 12%
simple interest per annum ?

Solution: I = Pv × r × t
1
= (R8 000) ( 0,12) (0,5) or (R8 000 )( 12 %)( )
2

= R 480

5.3 CALCULATOR SKILLS

Remember when calculating FV = Pv (1 + r n) with a simple calculator to do the

following: 1. multiply r and n ; 2. add 1 to the product of r and n ; 3. multiply answer
in 2 with Pv

5.4 ACTIVITY : REAL LIFE APPLICATIONS

1. You applied for a loan of R45 000 for 3 years at

a simple interest rate of 18% per annum.

a) Calculate the amount of interest.

b) What is the total amount that you have to repay after 3 years?

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2. Which one of the following two savings investments will earn the
most simple interest?
1
A: R5 500 invested at 5 % per annum for 4 years.
2
B: R7 000 invested at 4% per annum for 4 years.

3. How much money did John borrow if he had to pay R4 750 interest on a
5 year loan at 19% simple interest per annum.

4. Client A’s money is held in trust at your firm while you are finalising his estate of
R 2 356 000. Calculate 6% simple interest that your firm has to pay the estate after 45
days.

5. Your client instructed you to invest R 80 000 for 5 years at a simple interest rate of 18%
at a Swiss bank. Calculate the total amount in Euros that your client will receive after
the 5 years. (Exchange rate : 0,09004 ) (Remember that most of the countries in Europe
use the Euro as their common trading currency).

6. Complete the following table:

PV I r n or t FV

5 500 1 650 (a) 2 years

(b) 20 % 3,5 years 13 600

12 000 (c) 10 % 6 months

1 000 25 % 3 months (d)

7 500 2 700 18 % (e)

150 (f) 20 % 1 month

(g) 16,5 % 4 years 3 735

9 000 810 12 % (h)

1 560 (i) 1,5 years 8 060

214,50 13 % 2months (j)

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6. COMPOUND INTEREST
6.1 INTRODUCTION

If the interest added to the initial investment or loan (PV ) and interest in the
following period is calculated on the initial amount plus the interest earned in the
previous period, then the interest has been compounded.
6.2 CALCULATING COMPOUND INTEREST

6.2.1 WITHOUT THE FORMULA : METHOD OF REPEATED CALCULATION OF INTEREST

Example 1: Invest R5 000 for 3 years at a compound interest rate of 15% per annum.

Solution:

15
I1 = PV  r = 5 000 x = R750
100

F v1 = PV + I1 = 5 000 + 750 = R5 750

I2 = FV1  r = 5 750 x 15 % = R862,50

FV2 = 5 750 + 862,50 = R6 612,50

I3 = 6612,50 x 15 % = R991,88

FV3 = F v2 + I 3 = R7 604,38

The total interest over the 3 years is R2 604,38

6.2.2 USING THE COMPOUND INTEREST FORMULA

Fv = PV (1 + r)n / r )n where Fv is the future value ; PV is the present

Fv = Pv (1 + 100

value ; r is % interest (either as decimal or common fraction) and n is the time in

years.

Example 1: Invest R5 000 for 3 years at a compound interest rate of 15% per annum.

Solution: Fv = 5 000 (1+0,15)3 = R7 604,38

( Interest = Fv - Pv = R 7 604 – R 5000 = R 2 604)

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6.3 ACTIVITY : REAL LIFE APPLICATIONS

1. Invest R2 500 in a fixed deposit for 3 years at
compound interest rate of 15%. What is the total
interest after the 3 years?

2. Invest R10 000 at the bank for 4 years at a compound interest rate of 12 12 %.

After two years the rate dropped to 11%. What was the value of the investment
after the 4 years?

3. Invest R3 300 for 10 years at a compound interest rate of 12%. What is the value of
the investment after 10 years?

4. An investment of R5 200 is made for 3 years at a compound interest rate of 9%

per annum. After the 3 years the interest rate goes up to 11% per annum, and
the money is invested for a further 2 years. What is the value of the investment
after this period?

5. An investment of R 452 500 is made at a compound interest rate of 13% per

annum, for 44 days. How much interest is earned?

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7. DEPRECIATION

7.1 INTRODUCTION

Depreciation is applied to all depreciable assets; i.e. assets

that will be used for more than one financial year but, have a
limited useful life (such as computers, cars electrical
equipment etc.) This implies that the value of a car or a
computer will be less at the end of a year than its value at
the beginning of the year. Depreciation is the process of
spreading the acquiring cost of an asset over its useful
economic life, that is over the period which it is used to
produce income in the business.

Depreciation does not arise from a source document, but from a decision by
management to apply a particular basis of depreciation. Depreciation should serve
to put funds aside for replacement of the asset at the end of its useful life.

Various methods can be used to calculate depreciation. The choice of the method
of depreciation to be used for specific non-current assets involves many
considerations, but ultimately it requires a decision by management.

There are two main methods of depreciation:

 Straight – line method

 Reducing balance method

TYPICAL DEPRECIATION POLICIES

Type of Asset Policy

Motor vehicles Straight – line 3 years

Leasehold Property Straight – line over the period of the lease

Freehold land Usually not depreciated

Fixtures and fittings Reducing balance 15%

Computer equipment Straight – line 3years

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7.2 THE STRAIGHT LINE METHOD

This method allows equal portions of the amount subject to depreciation to be

allocated to each accounting period over the estimated useful life of the asset.
In other words the net book value of an asset is reduced by the same amount each
period. This means that you to that you divide the total value of an asset by the
number of periods and this fixed amount is taken off the balance of the asset at the
end of each period.

7.2.1 WRITING OFF A FIXED AMOUNT

An equal monetary amount is depreciated in each accounting period over the
estimated useful life of the asset. The amount subject to depreciation is calculated by
subtracting any expected residual value (the remaining value of the asset e.g. the
trade in value of a car) form the cost of the asset.

cost - residual value

Formula: Annual depreciation =
period useful life

Example 1: A firm buys a car on 1 January 2003 for R50 000(CP) and expects it to have a
trade-in value of R27 500(book value) on 31 December 2007. On the straight-
line method, what will the annual depreciation be?

Solution: Amount to be written of to depreciation:

= R50 000 – R27 500
= R22 500
Number of years =5
22500
Annual depreciation =
5
= R4 500

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From this information, a depreciation table may be drawn up:

Financial Cost Price Annual Accumulated Book value
period Depreciation Depreciation
1/1/2003 50 000 - - 50 000
31/12/2003 50 000 4 500 4 500 45 500
31/12/2004 50 000 4 500 9 000 41 000
31/12/2005 50 000 4 500 13 500 36 500
31/12/2006 50 000 4 500 18 000 32 000
31/12/2007 50 000 4 500 22 500 27 500

7.2.2 WRITING OFF A FIXED PERCENTAGE

An equal amount is allocated to each accounting period over the life of the asset.
This amount is a fixed percentage of the Cost Price.
Formula: Annual depreciation = % of Cost price (CP)

Example 1: A firm buys a computer on 1 January 2006 for R25 000. Depreciation is
provided for at 20% per year on cost. Calculate the book value on
31/12/2007

20
Solution: Annual depreciation: 20% of R 25 000 = × 25 000 = R 5 000 per year
100
Number of years = 2 x R 5 000 = R 10 000
Book value = R 25 000 – R 10 000 = R 15 000

From this information, a depreciation table may be drawn up:

Financial Cost Price Annual Accumulated Book value
period Depreciation Depreciation
31/12/2006 25 000 5 000 5 000 20 000
31/12/2007 25 000 5 000 10 000 15 000

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7.3 THE REDUCING BALANCE METHOD ( also known as reducing on book value)

This method is based on the premise that the decrease in an asset’s value is greater in
the first years of use than later in its life. This method usually results in a consistently
decreasing depreciation write-off from year to year and is therefore known as the
reducing balance method or the diminishing amount method. The calculation is usually
a fixed percentage and is based on the book value (reducing or diminishing balance),
which is the difference between the cost and the total depreciation already written
off. The fixed percentage is selected so that the cost of the asset is virtually written off
totally during its life. The chosen percentage is often twice the percentage used in the
straight-line method.

7.3.1 WITHOUT A FORMULA – LONG METHOD (also using a table if preferred)

Example1: Suppose a company buys a motor vehicle for R80 000 on 1 January 2004. The
accounting period is from 1 January to 31 December. Depreciation is 20% per
year on the reducing balance method. Calculate book value and accumulated
depreciation at 31/12/2006.
Solution:
20
31/12/2004: Depreciation = 20% of R 80 000 = × 80 000 = R 16 000
100
: New Book value = R 80 000 – R 16 000 = R 64 000

20
31/12/2005: Depreciation = 20% of R 64 000 = × 64 000 = R 12 800
100
: New Book value = R 64 000 – R 12 800 = R 51 200
20
31/12/2006: Depreciation = 20% of R 51 200 = × 51 200 = R 10 240
100

 Book value = R 51 200 – R 10 240 = R 40 960

Accumulated depreciation = R 80 000 – R 40 960 = R 39 040

OR R 16 000 + R 12 800 + R 10240 = R 39 040

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From this information, a depreciation table may be drawn up:

Financial Cost Price Annual Accumulated Book value
period Depreciation Depreciation
31/12/04 80 000 16 000 16 000 64 000
31/12/05 80 000 12 800 28 800 51 200
31/12/06 80 000 10 240 39 040 40 960

7.3.2 USING A FORMULA

A formula to calculate the new book value after depreciation on the reducing balance
method can be used.

n
Formula(New Book Value) = CostPrice(CP) 1 - rate  where CP = the initial value ;
rate is the % depreciation (either written as a common fraction with a denominator of
100 or a decimal ; n is the period in years.
The accumulated depreciation is: CP – New Book Value.

Example1: Suppose a company buys a motor vehicle for R80 000 on 1 January 2004. The
accounting period is from 1 January to 31 December. Depreciation is 20% per
year on the reducing balance method. Calculate book value and accumulated
depreciation at 31/12/2006.

n
Solution: Formula = (CP) 1 - rate 

80 000 (1 - 0,2)3 = R 40 960

 New value after depreciation = R 40 960

Accumulated depreciation amount = R 80 000 – R 40 960 = R 39 040

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7.4 ACTIVITY : REAL LIFE APPLICATIONS

1. A company has an accounting period from 1 January to 31 December. A motor

vehicle is purchased on 1 January 2010 for R75 000 and the company decides to
depreciate it according to the straight-line method at 33 1 3 % on cost per year.
What is the book value on 31/12/11?

2. Suppose a company has an accounting period from 1 January to 31 December.

On 1 January 2009 the company buys a piece of machinery for R10 000.
Depreciation is allowed for 60% on book value (i.e. reducing balance method).
What will the machine’s book value be after 4 years?

3. Your firm has an accounting period from 1 January to 31 December. They make
the following purchases:

1 January 2012: Vehicle for Ian Frank R75 000

1 January 2013: Vehicle for Mark Gilman R85 000

1 January 2013: Microphones (machinery) R15 000

Depreciation is allowed for at 25% per annum on book

value (i.e. reducing balance method). Each of the two
cars is expected to have a trade in value of R10 000 on
31 December 2014. What is the accumulated
depreciation and book value of each vehicle and piece
of machinery on 31/12/14?

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