LESSON – 9
HIRE PURCHASE AND INSTALMENT PURCHASE SYSTEM
OBJECTIVES
After reading this unit, you should be able to:
• explain the meaning of hire purchase and instalment systems
• explain the important definitions and terms used
• describe the features of hire purchase and instalment systems
• discuss the different accounting treatements
• distinguish between hire purchase and instalment systems
• calculate the interest
• ascertain the profit and prepare various accounts.
STURCTURE
Introduction
Hire Purchase System
Distinction between Hire Purchase and Instalemnt Systems
Accounting Treatement for Hire Purchase System
Calculation of Interest
Default and Repossession
Accounting Treatment for Goods of small value
Unit Questions
9.1 INTRODUCTION
Hire purchase system is a special system of purchase and sale. When goods are bought under the system. The purchaser pays the price in instalments which my be monthly, quarterly, six monthly, yearly or any other period. The buyer acquires the possession of the goods immediately on signing the hire purchase agreement but becomes its owner only on paying the last instalment. In case the buyer defaults in the payment of any instalment, ,the seller will have a right to repossess the goods from the buyer and forfeit the amount already received treating it as a hire charged. But if the buyer pays all the instalments on the due dates. The seller has on right to possess the goods from the buyer.
9.2 HIRE PURCHASE SYSTEM
Hire purchase may be defined as. “ a transaction where goods are purchased and sold with the stipulation that payment will be made by instalments, each instalments will be treated a hire charge so that if default is made in the payment of even the last instalment, the seller will be entitled to take away the goods without compensation the hire purchase in any way and in case all instalments are paid, the goods will be treated as sold and property will pass to the purchaser.”
Features of Hire Purchase System.
a. Purchase is on credit.
b. Purchase price is paid in instalments.
c. Goods are delivered to the buyer.
d. Buyer has a right to use these goods.
e. Owenership in the goods remains with the seller till the payment to last instalments.
f. Hire purchaser becomes the owner of the goods on payment of the last instalment.
g. It is the duty of the purchaser to keep the goods in good conditions till the payment of last instalment.
h. Hire purchaser has a right to terminate the agreement at any time.
i. If default is made in payment of instalment to the vendor, he can take possession of the goods subject to legal requirement.
Important Terms used in HP Agreement
Cash Price
It is the amount for which an article can be purchased immediately by making lump sum payment, without there being any facility of instalment.
Hire Purchase Price
It means the total sum payable by the hirere under a Hire purchase agreement. This includes any deposit or intitial payment, but does not include any sum payable as penalty or compensation for a breach of agreement.
Thus
Hire Purchase Price = Cash Price + Interest Charged.
Net Cash Price
It mean the cash price of the goods as required to be stated in the hire purchase agreement less any deposit. Deposit refers to intitial payment whether paid or credited to be paid as per the tems of the hire purchase agreement.
Down Payment
It is the amount required to be paid by the buyer on signing the agreement under hire purchase or instalment system. It is a part of hire purchase price. The Hire purchaser may possess the goods after making the down payment. Some times the hire vendor may allow the hire purchaser to possess the goods even without making the down payment.
Instalment System
In is a system of outright purchase with the facility to pay the price in certain instalments inj future together with interest at the agreed rate. Under the instalment system. The title to goods passes from the seller to the buyer immediately on signing the contract.
Accounting Procedure
Transaction relating to instalment system of sale are recorded in the books of both the parties in the same way as under hire purchase. As in the case of ordinary credit sales, the total price should be debited to the purchaser and credited to the sales account by the vendor on signing the contract . Further , as the total interest is also agreed upon at time of making the contract, the same should also be debited to the purchaser along with the sales price/. Howefer, the total interest as agreed upon does not accrue on the date of transaction & hence should not be credited to interest account, the same should be credited to interest suspense account. As and when interest falls due, the amount of interest applicable to the instalment is transferred from the interest suspense account to interest account. The balance in the interest suspense account is shown in the Balance Sheet.
The accounting procedure stated above were resembles the interest suspense method followed under hire purchases system. So the accounting entries in both the system are the same. But under instalment system the terms seller vendor shall be used instead of Hire seller/Hire vendor.
9.3 Distinction between Hire purchase and Instalment systems
Hire Purchase System. Instalment System
i) The Parties to the contract are called hire purchase & hire vendor.
ii)The relation between the hire purchaser & the hire vendor is that of a bailey & bailer,. As a result, the hire purchaser has no right of disposal of goods till the becomes the owner.
iii)It the Hire purchaser has taken as much care of the goods as is required to the taken by the bailer he is not responsible for the loss of goods.
iv) The property in the goods passes from the hire vendor to hire purchases usually on paying the last instalment or the minimum amount of instalment as per provisions of the hire purchase Act.1972
v) If the Hire purchaser makes a
default in payment of an instalment,
the hire vendor can repossess the
goods. i) The parties in the contract are called
buyer & seller.
ii) It is a contract of sale No bailment is involved. As a results the buyer can dispose off the goods as he likes.
iii) As the buyer becomes the owner on signing of the contract any loss of goods will have to the borne by the buyer.
iv) The property in the goods passes to the buyer as soon as the contract is signed
v) If the buyer makes any default in payment of an instalment the seller can only sue for balance of the amount unpaid together with interest, he cannot repossess the goods.
9.4 Accounting Treatment for Hire Purchase system.
Accounting records are to be kept both by the lbuyer and seller. The method of recording hire purchase transation in the account books depends upon nature of goods is(i) where they are of considerable value or (ii) Comparatively small value.
Goods of considerable value
There are two methods of recording hire purchase transactions in the books of the buyer. They are.
1. Credit Purchase Method
2. Asset Accrual Method.
(I) Credit Purchase Method ( First Method)
Under the system the goods purchased on hire purchase is treated as property of the buyer on the assumption that asset has been purchased with the intention of paying all the instalments on the due date. Under this method the following entries are to be passesd in the books of the buyer and vendor.
Hire Purchase System. Instalment System
i) When asset is purchased or
H.P System
Asset A/c Dr
To Hire Vendor A/c
ii) For down payment
Assets A/c Dr
To Hire Vendor A/c
iii)For interest due at the end of the year
Interest A/c Dr.
To Hire Vendor A/c
i) When goods are sold on H.P
Hire Purchaser A/c Dr.
To Hire sale A/c
For receipt of down payment
Cash/Bank A/c Dr
To Hire Purchase A/c
For Interest due at the end of the year
To Hire Purchase A/c Dr.
To Interest A/c
Hire Purchase System. Instalment System
iv)For the payment of the first
instalment
To Hire Vendor A/c Dr
To Bank A/c
v) When depreciation is charged
Depreciation A/c Dr.
To Assets A/c
vi)For transfer of interest and
department
P & L A/c Dr.
To Interest A/c
To Depreciation A/c
Note: Entries I, iv,v and vi will be
repeated in subsequent years.
Asset in this case will be shown in the Blance sheet after deducting depreciation and balance due to the vendor. iv) For receipt of instalment
Cash/Bank A/c Dr.
To Hire purchaser A/c
For transfer of interest
Interest A/c Dr.
To P & L A/c
For closing hire sale
Hire sale A/c Dr.
To Trading A/c Dr.
Note: Entries iii,iv,and v will be repeated in subsequent years.
Hire Purchaser’s Books
i)
ii)
iii)
iv)
v)
vi) For the down paryment due
Asset A/c Dr.
To Hire vendor A/c
For down payment on delivery of the asset.
To Hire Vendor A/c Dr.
To Bank A/c
When the first instalment become due
Asset A/c Dr. (Cash price)
Interest A/c Dr. (Interest)
To Hire Vendor A/c
When first instalment is paid
Hire vendor A/c Dr.
To Bank A/c
When depreciation is charged
Depreciation A/c Dr.
To Asset A/c
For transfer of interest and depreciation
P & L A/c Dr.
To Interest A/c
To Depreciation A/c
Note: Entries iii, iv, v and vi will be repeated in subsequent years.
Asset will be shown in the Balance sheet at purchase cost minus depreciation.
Calculation of cash price when the rate of interest and different instalment only are given.
Sometimes, the cash price of the asset bought under hire purchase system may not be available . But the amount of different instalments and rate of interest will be given . In such case, the price is arrived at by back calculation. The procedure to calculate cash price is to take up the final instalment first and to deduct the interest from it.
Rate of Interest
Formula: -------------------------
100 + rate of interest
Suppose A owes B.Rs.100, interestmm being 10% p.a. At the end of the year A will have to pay Rs.100 out of which Rs.10 is for interest. Hence 10/110 of the sum due at the end of the year is interest . If this interest is deducted from the sum due at the end of the year, the residual will be the sum due at the beginning of the year.
Calculation of Interest when rate is not given
If cash price and each instalment amount together with down payment are given but rate of interest is not given, then total interest will be calculated by deducting cash price from the total hire purchase price. Total interest should be divided in the ratio of amount outstanding for each year.
9.4.2 Default and Repossession
In the event of not paying an instalment due, the hire vendor reserves the right to take back the goods from the purchaser. In such a case the vendor can also forfeit the amonts received from the purchaser hither to considering them only as hire. When the vendor sells different goods to the same party under hire purchase system, he may, at his optin either reposses al the goods or a part therof in case of default. Thus the repossession may be either complete or partial depending upon the circumstances of each case.
Complete Repossession
Entries for interest and depreciation up to the date of default will be passed in the books of the buyer & vendor. As the payment of the particular instalment is not made, it is not recorded. On repossession, the buyer will close the accounts of the vendor by transferring its balance to asset accounts by debiting the ventor’s account & crediting the asset account. Any balance in the asset account will be either profit or loss on repossession which will be transferred to the Profit and Loss account.
The hire vendor will close account of the hire purchaser by transferring its balance to “Repossessed stock account” This account will further be debited with expenses incurred in repairing and credited with sales price. The balance will represent profit or loss on repossessed goods and will be transferred to Profit and Loss account.
Partial Repossession
In the use also entries for interest and depreciation will be passed in the bookds of the hire purchasera and hire vendor for the period till the date of default in payment. Both the hire purchaser and hire seller will pass entries in their respective books for the agreed value of the assets which has been taken back by the vendor. Generaly the vendor takes back the asset at a higher rate of depreciation. The hire purchaser will calculate the value of the asset left with him after partialrepossession and caryy down the amount to next priod. The asset account balance will show profit or loss on default and will be transferred to profit and loss account. In the books of the vendor. The repossessed assets account it debited with any amount spent for repairing it and credited with the sales price. The difference in this account is the profit or loss of the vendor in connection with repossession.
9.4.3 When the goods are of comparatively small value (Hire Purchase Trading Account)
When hire purchase transactins are numerous, and the goods sold are of small value. The hire vendor may find it difficult, expensive and time consuming to calculate interest on their sales individually. The vendors of such items usually consider interest as part of the selling price and do not calculatd and charge interest separately. The method followed in such cases is called “ Goods out” or Stock method.
Under this method, goods sent out on hire purchase are treated as stock. No individual account of any hire purchase is opened on the basis of double entry. The details of all the transaction are recorded in a register which is only a memorandum, not forming part of double entry. The register, out of which the necessary information pertaining to each customer is collected. Forms the basis of preparing a Hire Purchase Trading Account, which is the most important account under this method. The hire purchase trading account may be prepared on the basis of cost or selling price. In either case it is prepared on the basis of double entry as under.
i)
ii)
iii)
iv)
v)
vi)
vii)
When goods are sold on hire price
Hire Purchase trading A/c Dr
To Goods sold on hire purchase A/c
On receipt of instalmens
Cash A/c Dr.
To Hire Purchase trading A/c
For instalments due at the end of the year
Instalment due A/c
To Hire Purchase trading A/c Dr.
For Goods reposed on default
Goods repossessed A/c Dr.
To Hire purchase trading A/c
For instalments not yet due at the end of the year
Hire purchase stock A/c Dr. (H.P.Price)
To Hire Purchase trading A/c
To remove the loading in H.P sales
Goods sold on Hire Purchase A/c Dr.
To Hire purchase trading A/c
To remove loading in closing stock
Hire Purchase trading A/c
To Stock reserve A/c
LF Rs. Rs.
The hire purchase trading account will not show profit or loss and should be closed by transferring to P & L A/c . The Instalment due A/c , Hire purchase stock A/c and Stock reserve A/c will be transferred to Hire purchase trading A/c of the next year.
Proforma
Hire Purchase Trading Account
Dr. Cr.
To Opening Balance
Hire Purchase Stock
Hire Purchase Debtors
To Goods sold on Hire Purchase
To Hire Purchase Stock Reserve A/c
To Profit t/f to General P & L A/c Rs.
By Hire Purchase Stock
Reserve
By Bank A/c
By Goods sold on Hire
Purchase A/c
By Goods Repossessed
A/c (at revalued figure)
By Closing Balances:
Hire Purchase Stock
Hire Purchase Debtors. Rs.
9.4.1 COMPUTATION OF INTEREST
EXAMPLE-1
(When rate of interest ,total cash price and instalments are given)
X purchase a car a hire – purchase system. The total cash price of the car is Rs. 15,980 , payable Rs.4,000 down and three instalments of Rs.6,000 , Rs.5,000 and Rs.2000 payable at the end of first, second and third years respectively. Interest is charged at 5% p.a.You are required to calculate the interest paid by the buyer to the seller each year.
Solution
Calculation of Interest paid each year.
Year & Date 1
Total Cash Price
Rs. 2
Instalment Paid
Rs. 3
Interest Paid
Rs. 4
Cash Price
Paid (i.e.2-3)
Rs.
Down payment
End of 1 year
End of II year
End of III year
15,980
-4,000
11,980
5,401
6,579
4,671
1,908
1,908
4,000
6,000
5,000
2,000
-
599
329
092
4,000
5,401
4,671
1,908
Note: Interest is calculated on the total of cash price remaining unpaid at the end of each year.
Example-2 (When rate of interest is not givein)
On 1st January 1980 Messrs .ABC and Co., took delivery from XYZ and Co., of a machine of hire purchase system .Rs.1,500 being paid on delivery and the balance in five instalments of Rs.3,000 each , payable annually on 31st December . The cash price fo the machine was Rs. 15,000. Calculated the amount of interest paid for each year.
Solution
In case where the rate of interest is missing , total interest which is the difference between total cash price paid and total instalment price paid is Rs.1,500 (Rs.16,500 – 15,000) is simply divided in the ratio of outstanding balance of instalment price as done below
Total instalment Instalments Ratio
Price Rs.16,300 Outstanding Outstanding
instalments
At the end of 1st year 15,000 3
At the end of 2nd year 12,000 4
At the end of 3rd year 9,000 3
At the end of 4th year 6,000 2
At the end of 5th year 3,000 1
----
15
----
Interest charge should be:
In 1st year 5/15 x Rs.1,500 = Rs.500
In 2nd year 4/15 x Rs.1,500 = Rs.400
In 3rd Year 3/15 x Rs.1,500 = Rs.300
In 4th year 2/15 x Rs.1,500 = Rs. 200
In 5th year 1/15 x Rs. 1,500 = Rs. 100
Example – 3 (When cash price is not given)
Thiru Rajan purchased a washing machine under hire purchase system. As per agreement he has to pay Rs.8,000 down. Rs.4,000 at the end of the 1st year Rs.3,000 at the end of 2nd year and Rs.7,000 at the end of the 3rd year. Interest is charged at 5% p.a. Calculate the Cash price of the machine and amount of interest payable on each instalment.
Solution
Calculation of cash and amount of interest payable in cash instalment
Year Instalment Interest paid Cash Price
Down payment
At the end of 1 year
At the end of 11 year
At the end III year
Rs.
8,000
4,000
3,000
7,000 Rs.
Nil
(6,667 +2540 +4,000)x5/105=629
(6,667 + 3,000) x5/105= Rs. 460
7,000 x5/105 = 333
Rs.
8,000
3,371
2,540
6,667
Total cash price 29,578
Calculation are to be started from 3rd year to 1st year
Rs.
Total cash price 20,578
Total Interest (629 + 460+333) 1,422
Hire purchase price 22,000
Example –4
Mr. Raju purchased 4 cars for Rs.14,000 each on 1.1.92 under the hire purchase system. The hire purchase price for all the 4 cars was Rs.60,000 to be paid as Rs.15,000 down payment and 3 equal instalments of Rs.15,000 each at the end of each year . Interest is charged at 5% p.a . The buyer depreciates the car at 10% p.a on straight line method.
From the above particulars give journal entries and relevant accounts in the books of Mr.P and in the books of hire vendor.
Solution
Table showing calculation of interest
Date of payment
(1) Total cash price
(2)
Instal paid
(3) Interest paid
(4) Cash price paid
(3) – (4) =(5)
Down
Payment
Ist instalment
II nd Instalment
III instalment 56,000 (14,000x4)
15,000
41,000
12,950
28,050
13,597
14,453
14,453
Nil
15,000
15,000
15,000
15,000
(41,000x5%)=2,050
(28,050 x5%)=1,403
(15,000 –14,453=547
--------
4,000
15,000
12,950
13,597
14,453
--------
56,000
Journal Entries in the books of Mr.P
1992 1993 1994
Dr. Cr. Dr. Cr. Dr. Cr.
Jan.1
Jan.1
Dec.31
Dec.31
Dec.31
Dec.31 Cash A/c Dr
To Hire vendor A/c
(Being purchase of cars on H.P)
Hire Vendor A/c Dr.
To Bank A/c
(Being cash down payment)
Interest A/c Dr.
To Hire Vendor A/c
(Being interest credited to vendor)
Hire Vendor A/c Dr.
To Bank A/c
(Being payment of instalment)
Depreciation A/c Dr.
To Cars A/c
(Being dep. Charged on cars)
Profit & Loss A/c Dr.
To Interest A/c
To Depreciation A/c
(Being int.& dep. Transferred)
56,000
15,000
2,050
15,000
5,600
7,650
56,000
15,000
2,050
15,000
5,600
2,050
5,600
1,403
15,000
5,600
7,003
1,403
15,000
5,600
1,403
5,600
547
15,000
5,600
6,147
547
15,000
5,600
547
5,600
Journal Entries in the books of Hire Vendor
1992 1993 1994
Dr. Cr. Dr. Cr. Dr. Cr.
Jan.1
Jan.1
Dec.31
Dec.31
Dec.31
P’s A/c Dr
To Hire Sales A/c
(Being cars sold on HP)
Bank A/c Dr.
To P’s A/c
(Being down payment received)
P’s A/c Dr.
To interest A/c
(Being interest credited to Mr. P.A/c)
Bank A/c Dr.
To P’s A/c
(Being instalment received)
Interest A/c Dr.
To P & L A/c
(Being interest transferred) 56,000
15,000
2,050
15,000
2,050
56,000
15,000
2,050
15,000
2,050
1,403
15,000
5,600
1,403
15,000
1,403
547
15,000
547
547
15,000
547
Leger Accounts in the books of P (Hirer) Cars A/c
Dr. Cr.
1.1.92
1.1.93
1.1.94
1.1.95
To Vendor A/c
To Balance b/d
To Balance b/d
To Balance b/d Rs.
56,000
56,000
50,400
50,400
44,800
44,800
39,200
31.12.92
31.12.93
31.12.94
By Depreciation
By Balance c/d
By Depreciation
By Balance c/d
By Depreciation
By Balance c/d
Rs.
5,600
50,400
56,000
5,600
44,800
50,400
5,600
39,200
44,800
Hire Vendor ‘s A/c
Dr. Cr.
1.1.92
31.12.92
31.12.93
31.12.94
To Bank A/c
To Bank A/c
To Balance c/d
To Bank A/c
To Balance c/d
To Bank A/c
Rs.
15,000
15,000
28,050
58,050
15,000
14,453
29,453
15,000
15,000
1.1.92
31.12.92
31.12.93
31.12.94
By Cash A/c
By interest A/c
By Balance c/d
By interest
By Balance b/d
By Interest
Rs.
56,000
2,050
58,050
28,050
1,403
29,453
14,453
547
15,000
Ledger Accounts in the Books of Hire Vendor Interest A/c
Dr. Cr.
31.12.92
31.12.93
31.12.94
To P & L A/c
To P & L A/c
To P & L A/c Rs.
2,050
1,403
547
31.12.92
31.12.93
31.12.94
By Mr.P’s A/c
By Mr P’s A/c
By Mr.P’s A/c Rs.
2,050
1,403
547
Mr.P’s A/c
Dr. Cr.
1.1.92
31.12.92
1.1.93
1.1.94
31.12.94
To Hire Sale A/c
To Interest
To Balance b/d
To Interest
To Balance b/d
To Interest Rs.
56,000
2,050
58,050
28,050
1,403
29,453
14,453
547
15,000
1.1.92
31.12.93
31.12.94
By Bank A/c
By Bank A/c
By Balance c/d
By Bank A/c
By Balance c/d
By Bank
Rs.
15,000
15,000
28,050
58,050
15,000
14,453
29,453
15,000
15,000
Calculation of Depreciation
Since depreciation is charged under straight line method. The same amount (56,000x10% = 5,600) is to be charged for all the three years.
Example -
Rakesh purchased a motor car on Hire purchase system. The total cash price of the car is Rs.15,980 payable Rs.4,000 down and three instalments of Rs.6000 Rs. 5,000 and Rs.2000 payable at the end of first, second and third year respectively. Interest is charged at 5%
You are required to prepare leder accounts in the books of Rakesh, Rate of depreciation is 10% on straight line method. (Calculation are to be made to the nearest rupees)
Solution
Ledger Accounts in the books of Rakesh Motor Car Account.
I Year
To Hire vendor A/c
II year
To Balance b/d
III year
To Balance b/d
Rs.
15,980
15,980
14,382
14,382
12,784
12,784
By Depreciation A/c (10%)
By Balance c/d
By Depreciation A/c
By Balance c/d
By Depreciation A/c
By Balance c/d Rs.
1,598
14,382
15,980
1,598
12,784
14,382
1,598
11,186
12,784
Hire Vendor Account.
I Year
To Cash down A/c
To Cash (1” Inst)
To Balance c/d
II year
To Cash (II Inst c/d)
To Balance c/d
III year
To Cash(III Inst)
Rs.
4,000
6,000
6,579
16,579
5,000
1,908
6,908
2,000
2,000
By Motor Car A/c
By Interest
By Balance b/d
By Interest
By Balance b/d
By Interest Rs.
15,980
599
16,579
6,579
329
6,908
1,908
92
2,000
9.4.2 DEFAULT AND REPOSSESSION
(A)Complete Repossession
Example:-
Parimala purchases a machine for Rs.56,000, Payment to be made Rs.15,000 down and 3 instalments of Rs. 15,000 each at the end of each year. Rate of interest is charged at 5% p.a Buyer depreciates Machine at 10% p.a on written down value method.
Because of financial difficulties, parimal after having paid down payment and 1st instalment at the end of 1” year , could not pay second instalment and seller took possession of Machine. Seller after spending Rs.350 on repair of the asset, sold it away for Rs. 30,110.
Show ledger accounts in the books of both the parties.
Solution
In the Books of P
Machinery Account
To Hire Vendor a/c
To Balance b/d
Rs.
56,000
56,000
50,400
50,400
By Depreciation a/c
By Balance c/d
By Depreciation a/c
By Hire Vendor a/c
(Repossession)
By P & L (bal.fig)
Rs.
5,600
50400
56,000
5,040
29,453
15,907
50,400
Hire Vendor Account
To Bank a/c
To Cash (I Inst)
To Balance c/d
To Asset
(Repossession) Rs.
15,000
15,000
28,050
58,050
29,453
29,453
By Truck a/c
By Interest
By Balance b/d
By Interest
Rs.
56,000
2,050
58,050
28,050
1,403
29,453
Parimala Account
To Sales a/c
To Interest
To Asset
(Repossession) Rs.
56,000
2,050
58,050
29,453
29,453
By Cash (down)
By Cash (I Inst.)
By Balance c/d
By Goods repossessed
(bal.fig)
Rs.
15,000
15,000
28,050 58,050
29,453
29,453
Goods repossessed Account
To Parimala’s a/c
(repossessed)
To Cash (repair)
To P & L a/c
(Profit on resale)
Rs.
29,453
350
307
30,110
By Cash (resale)
Rs.
30,110
30,110
Interest Calculation
1 Year 56,000 – 15,000 = 41,000 x5/100 = 2,050
II Year 41,000 - 12,950 = 28,950 x 5/100 = 1,403.
(B) Partial repossession
Example-14
Ramu Purchased four machines of Rs.14,000 each by the Hire purchase system. The hire purchase price for all the four machines was Rs.60,000 to be paid as Rs.15,000 down and three instalments of Rs.15,000 each at the end of each year. Depreciation is written off at 10% per annum on the straight line method.
Down payment and first installment were paid. On the default, vendor took possession of three machines leaving one machine with buyer. The machines were taken by the vendor at a depreciated value of 20% per annum under written down value method. Vendor has spent Rs.1,200 on repairs and sold the three machines for Rs.35,000.
Required: Give the ledger accounts in the books of Ramu and Hire Vendor
Solution
Table showing calculation of interest
Particulars Instalments Interest Cash price
I = 45,000
------------ x 4000
90,000
II = 30,000
---------- x 4,000
90,000
III = 15,000
--------- x 4,000
90,000 15,000
(Down payment)
15,000
15,000
15,000
60,000
2,000
1,333
667
4,000 15,000
13,000
13,667
14,333
56,000
Outstanding Balance on each Instalment
Hire Purchase price 60,000
Less: Down payment 15,000
On I outstanding balance 45,000
On II instalment outstanding balance 30,000
On III instalment outstanding balance 15,000
Total outstanding Balance 90,000
Interest = 60,000 – 56,000 = Rs.4,000
Value of machine left with the buyer Rs. Value of machine taken away Rs.
No. of machine –one Cost price :1xRs.14,000
Depreciation : @ 10% p.a
SLM for 2 years
14,000 x 10/100x2
Value of asset left with the buyer at the end of 2nd year
14,000
2,800
11,200 No.of macnines – three
Cost of price 3x14,000
Depreciation : @ 20% p.a WDV method for 2 years (Rs.8,400 + 6,720)
Value of asset taken away at the end of 2nd year
42,000
15,120
26,880
Ramu’s Books
Machinery Account
To Hire Vendor’s A/c
(4 machine)
To Balance b/d
Rs.
56,000
56,000
50,400
50,400
By Depreciation A/c
By Balance c/d
By Depreciation A/c
By Hire Vendor’s A/c
(taken value)
By P & L (Loss)
By Balance c/d (left value)
Rs.
5,600
50,400
56,000
5,600
26,880
6,720
11,200
50,400
Hire Vendor Account
To Cash A/c (Down payment)
To Cash A/c (1st Year)
To Balance c/d
To Machinery A/c
To Balance c/d Rs.
15,000
15,000
28,000
58,000
26,880
2,453
29,333
29,333
By Machinery A/c
By Interest A/c
By balance b/d
By Interest A/c
Rs.
56,000
2,000
58,000
28,000
1,333
29,333
Hire vendor Books
Ramu’s Account
To Sales A/c
To Interest A/c
To Balance b/d
To Interest A/c
Rs.
56,000
2,000
_____
58,000
28,000
1,333
29,333
By Cash A/c
By Cash A/c
By Balance c/d
By Goods Repossessed A/c
By Balance c/d
Rs.
15,000
15,000
28,000
58,000
26,880
2,453
29,333
Goods Repossessed Account.
To Ramu’s A/c
To Cash A/c (Repairs)
To Profit /Loss
Rs.
26,880
1,200
6,920
35,000
By Cash A/c (sales)
Rs.
35,000
35,000
9.4.3 HIRE PURCHASE TRADING ACCOUNT
Debtors Method
Example
A trader sells goods on hire purchase adding 60% to cost, from the following particulars, prepare Hire Purchase Trading Account and as certain profit or loss made by him.
1995 Jan.1 Stock with customers at selling price Rs. 21,600
Dec.31 Goods sold on hire purchase during
The year at selling price Rs. 87,120
Cash received during the year Rs. 57,720
Stock with customers at selling price Rs. 48,000
Instalments due but not received Rs. 5,000
Solution
Hire Purchase Trading Account for the year ended 31st Dec. 1995.
To Opening Stock
To Goods sent on H.P
To Stock Reserve
To Profit & Loss A/c
Rs.
21,600
87,120
18,000
24,770
1,51,490
By Bank
By Instalments
By Closing stock
B Stock Reseve
By Goods sent on H.P Rs.
57,720
5,000
48,000
8,100
32,670
1,51,490
Calculation of Loading
Cost Rs. 100
Profit Rs. 60
---------
Selling Price Rs. 160
---------
Loading = 60 /160
Loading on opening stock = 21,600 x 60/160 = Rs. 8,100
Loading on goods sent on hire purchase= 87,120 x60/160= Rs. 32,670
Loading on closing stock = 48,000 x60/160= Rs.18,000
Example
Revathi & Co sells goods on H.P system at cost plus 60% .From the following information prpare Hire purchase
Trading account to ascertain the Profit or Loss for the year 1996.
1.1.96 Goods with H.P customers (at H.P Price) 16,000
31.12.96 Goods sold on H.P during the year at H.P Price 80,000
Cash received during the year from customers 56,000
(Instalments due Rs.2,000) valued at 300
Goods with the H.P customers at H.P Price 36,000
Solutuion
Hire Purchase Trading Account for the year ended 31st Dec.1996
To H.P Stock at cost price
(16,000 x100/160)
To Goods sold during the year
At cost (80,000 x100/160)
To Profit & Loss A/c Rs.
10,000
50,000
20,800
80,800
By cash received
By Goods repossessed
A/c (market value)
By Instalment due and unpaid
By H.P Stock at cost
Price(36,000x100/160)
Rs.
56,000
300
2,000
22,500
80,800
Instalment due A/c
To Instalment not yet due
To H.P Sales
Rs.
16,000
80,000
96,000
By Cash
By Goods repossessed
By Instralments not yet due
By Instalmens due and unpaid (b/f)
Rs.
56,000
2,000
36,000
2,000
96,000
Unit Questions
1. What do you mean by Hire Purchase system?
2. What is stock and debtors system?
3. Distinguish between hire purchase system and instalment purchase system.
4. How to prepare hire purchase trading account?
5. From the following information, calculate the amount to be paid to the owner if the hire purchaser intends to complete the purchase of goods.
Rs.
Cash Price 36,000
Down payment 3,600
Hire purchase price 39,000
No. of instalments 24
Instalments paid by the hire purchaser 18
When rate of interest , cash price and instalements are given.
6. On 1.1.2001 ,X purchased machinery on the hire purchase system. The payment is to be made Rs.4,000 down (on signing of the contract) and Rs. 4,000 annually for three years. The cash price of the machinery is Rs. 14,900 and the rate of interest is 5% . Calculate the interest included in each year’s instalment.
7. The Madras Trading co. purchased a mote car from Bombay Motors Co, on hire purchase agreement on 1.1.201 paying cash Rs.10,000 and agreeing to pay further three instalments of Rs.10,000 each on 31st December each year. The cash price of the car is Rs.37,250 and the Bombay Motor co, charges interest at 5% p.a . The Madras Trading co., written off 10% p.a as depreciation on the reducing balance method Jouranlise the above in the books of both the parties.
8. Mr.Raman purchased a T.V. on Hire Purchase on the following terms.
Rs. 1,200 to be paid on signing the agreement.
Rs.1,700 at the end of the first year.
Rs.1,600 at the end of second year.
Rs. 5,500 at the end of third and last year.
The hire vendors charge interest at 10% annum on each value of the T.V Mr.Raman wished to provide depreciation at 10% p.a on the diminishing balance method.
Required : Write up the necessary ledger accounts in the books of both the parties.
9. On 1.1.2002 kannan purchased a machinery from sukumar on hire purchase system. Cash price of the machinery was Rs.1,80,000. Rs.46,440 has to be paid on the date of purchase and a 5 annual instalments of Rs.30,000 are payable on 31st December every year. Sukumar charged intrest @ 4% p.a on the yearly balances.
Kannan fixed to pay the instalment due on 31.12.2002. onereupon sukumar took possession of the machinery and valued the same in his books after charging 15% depreciation under straight line method.
So the ledger accounts in the books of kannan.
10. Mr. S.R.S. sells goods on HP at cost plus 50% from the following particulars prepare the necessary ledger accounts for the year ended 31.12.2004.
Rs.
Jan 1. Stock with HP customers at selling price 45,000
Stock at shop at cost 90,000
Instalments due 25,000
Dec 31. Cash received from customers 3, 00,000
Goods repossessed instalments due 2,500
Instalments due customers paying 45,000
Stock at shop at cost excluding re possessed
Goods) 1,00,000
Goods purchased during the year 3,00,000
Dinesh Kandagatla
Dinesh
Kandagatla
an email at crmnldan1729@gmail.com
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