8.2: Rate

1) Lesson Objectives:

You should be able to understand

• the concept of rate

• how to solve simple interest questions

• what is hire purchase

• how to use currency exchange

• how to find income tax

A: Concept of Rates

B: Simple Interest

C: Hire Purchase

Cash Price: The amount you pay in full to buy the product

When you do not have enough cash to pay out front, you can use Hire Purchase to pay for your product.

You will need the following:

Deposit: You will need to pay an amount as deposit to confirm your purchase.

Balance Amount: This will be charged an interest so that you can take a period of time to repay the balance amount plus interest.

Hire Purchase Formula:

Hire Purchase = Deposit (Down Payment) + (Number of months x monthly instalment amount)

NOTE:

1. If you use hire purchase, you will usually pay higher than the cost price.

2. The rate that is used to calculate base on the balance amount is SIMPLE INTEREST RATE. Do not mix it up as a percentage.

D: Currency Exchange

1) Exchange rate is always about the buying and selling of foreign currency.

2) When there is buying and selling involve, we will take the stand of the person selling and buying the foreign currency: ie the Vendor. (Because they are the one who needs to earn the money).

3) You must know which country you are in.

In Singapore

Singapore $ to Malaysia $

S $ to Ringt $ (Selling rate because Ringt $ is the foreign currency)

Malaysia $ to Singapore $:

Ringt $ to S $ (Buying rate because Ringt $ is the foreign currency)

In Malaysia

Singapore $ to Malaysia $:

S $ to Ringt $ (Buying rate because S$ is the foreign currency)

Malaysia $ to Singapore $:

Ringt $ to S $ (Selling rate because S$ is the foreign currency)

In Malaysia convert USD$ to Aust$

[If foreign currency to foreign currency, must first convert foreign currency (USD$) to local currency then from the local currency to foreign currency(Aust$)]

(a) First have to convert USD$ to Ringt$ (Buying rate because USD$ is the foreign currency)

(b) Then convert the amount in Ringt$ from part (a) to Aust$ (Selling rate because Aust$ is the foreign currency)

E: Income Tax

Example: To find tax payable given chargeable income

Mr Tan earns a gross annual Income of $95 000. He is entitled to the following relief: one child support $1000, spouse support of $1000, CPF contribution of $1580 and donation of $500 . Find his income tax payable.

1) Chargeable Income = Gross Annual Income - Reliefs

Chargeable Income = $95 000 - $1000-$1000-$1580-$500 = $90 920

2) Find the range of the chargeable income from the table of income tax rates.

Since his chargeable income = $90 920, his range will be on the row 4 where First $80 000 is.

(Row 5 where First $120 000 is too much as he don't earn that much. Row 3 where First $40 000 is too little as you can see the First and the Next add up to $ 80 000 which is less than his chargeable income.)

So the row that we need to use to find the tax payable is row 4.

3) First $80 000 - Tax payable is $3350 (Fixed)

4) Next $ 40 000 is charge at an income tax rate of 11.5%

Balance chargeable income = Chargeable income - the first fixed amount.

Balance chargeable income = $90 920 - $ 80 000 = $ $10 920

Tax payable: 11.5% x $10 920 = $1255.80

Total Income Tax Payable is: $3350 + $1255.80 = $4605.80

NOTE: This payable tax amount from the balance chargeable income is found using percentage not Simple interest.

Example: To find chargeable income given tax payable

Miss Lim tax payable is $900. Find her chargeable income.

1) Since the first amount is always fix, we look at the amount that is closest to the tax payable.

If we look at row 2, the maximum tax payable is $550 (Adding the first and the next tax payable) which is less than what she is paying.

If we look at row 4, the amount of tax payable of $3350 base on First $80 000 is already more than what she is paying.

So the row that we need to use is row 3.

2) Working backwards

Since the First amount is always a fixed amount of tax payable ($550), we will subtract this tax payable amount from the total tax payable. Which means the First amount of chargeable income is $40 000

Balance Tax payable: $900 - $550 = $350

3) With the balance $350, we need to find the chargeable income by using the tax rate. Since the tax rate is on the balance chargeable income, the next $40 000 tax rate is 7%

(7/100) x (balance chargeable income) = $350

Balance chargeable income = (350 x 100) / 7 = $ 5000

Gross Chargeable income = $40 000 + $5000 = $45 000