Accountancy

Hire Purchase Accounts

Posted by Asok K Nadhani on

Last Updated on: 5th July 2024, 01:43 pm

Hire Purchase Accounts

Hire-Purchase System

Hire-Purchase system refers to a transaction method of sales where some amount of cash is paid on signing the contract (called down payment or spot payment), and the balance payment and interest thereon will be made in instalments to vendor. Under Hire Purchase system, the customer (hire purchaser) obtains possession of the goods at the outset on down payment and further instalments over an agreed period of time. When all instalments would have been paid, the right of ownership will be transferred from seller or vendor to the hire purchaser.

Terms used in Hire-Purchase

  1. Hire Vendor- Who sales goods (i.e. the seller) under hire-purchase system.
  2. Hire-Purchaser- To whom the goods are delivered or sold.
  3. Cash Price- It is the amount for which goods can be purchased immediately by making a lump sum payment at a time.
  4. Hire Purchase Price- It includes the cash price and the amount of total interest (also called finance charge) to be paid under hire purchase system. Thus Hire purchase price = Cash Price + Interest charged + charge to cover risk (in case of default in payment or return of goods in a damaged condition).
  5. Down Payment- It is the amount paid on signing the hire purchase agreement.

Features of Hire-Purchase System

  1. Nature of Agreement: A hire purchases agreement is a contract of bailment coupled with an option to the hire purchaser to acquire the goods delivered to him under such an agreement.
    1. Ownership & Possession: The possession of the goods and not their ownership is transferred to the hire-purchaser. The Goods remain the property of the vendor until all the instalments have been paid, and if default is made in payment of instalment by the hire-purchaser the vendor has the right to retake possession of the goods.
    2. Right of Purchaser: The hire-purchaser has right to terminate the agreement. If he so desires (not to pay all instalments), the hire-purchase agreement may be cancelled and the goods returned but vendor will forfeit the instalments paid till then, treating them as hire-charges. So, the hire-purchaser can not sell the goods to a third party.
    3. Responsibility: The hire-purchaser has responsibility for keeping the goods in good condition so long as they remain the property of the vendor and as the vendor retains the ownership of goods, he (vendor) must get them insured against loss or damage.
    4. Right and Option: In the event of a default of instalments, if the vendor is not able to recover back the goods, he may bring legal action against the purchaser for the recovery of the part of the goods.
    5. Price to be paid: Under this system the price to be paid (hire-purchase price) for goods is more than the cash price. The hire-purchase price includes the cash price plus interest on unpaid balance plus usually an additional amount to cover the risk of default.

Difference between Hire-Purchase and Credit Sales

A contract of hire-purchase differs from a contract of credit sale in the following ways:

Basis of differenceHire Purchase SystemCredit sales
1. Nature of    agreementHire Purchase is a contract of hiring coupled with an option to purchase.In case of credit sale, there is no hiring even if purchase price is paid in instalment.
2. Transfer of titleIn case of hire purchase, the hire purchaser has no right of ownership of goods and therefore he is not able to give good title to subsequent transferee.In case of a contract of sale a person has ownership rights over the goods and can transfer these to another person.
3. RepossessionIf the agreement is broken, the owner of the goods (vendor) can repossess it and sue for due instalments.If the agreement is broken, the seller can only sue for the unpaid instalments, but can not repossess the goods.

Calculation of Hire Purchase Interest

Hire Purchase price includes the cash price and the amount of interest payable. So, the total payment made under hire-purchase is more than cash price. It is necessary to calculate interest because the amount paid for interest is charged to revenue and the asset is capitalized only at the cash-price.

In case of calculation of interest, two situations may arise:

  1. When cash price and rate of interest are known,
  2. When rate of interest is not given.

Calculation of interest when cash price and rate of interest are known

It is simple if the cash price and the rate of interest are given. Two situations may arise:

  1. When interest is included in the amount of instalments,
  2. When interest is not included in instalments.

Hire Purchase Accounting entries – Interest included in Instalment Amount

When the hire-purchase price or total of all instalments including down payment exceeds cash price, it is regarded that interest is included in instalments at given rate on amount of cash price outstanding.

Ex. Cash price of asset purchased on hire-purchase system Rs.75,000. Down payment Rs.10,000. Instalments : 5 Annual Instalments of Rs.15,000 each. Rate of interest: 5% pa. Calculate interest included in each instalment.

Solution:

Image 20

Hire Purchase Accounting entries – interest not included in instalment Amount

Where total of instalments given price is equal to cash price, it will be regarded that interest is paid in additional to stated amounts of instalments.

Ex. On1st January 2008, XYZ Ltd. purchased a machinery on hire-purchase basis, cost price of which is Rs.80,000, Rs.20,000 was paid as down payment on signing of the contract and balance in three annual instalments of Rs.20,000 each on 31st December. Further, an addition interest @ 7.5% p.a. was also payable to vendors on outstanding balances.

Calculate the amounts of interest and instalments.

Solution:

Calculation of Interest

Image 21

Hire Purchase Accounting entries – Cash price and instalment amounts given

In this situation amount of total interest should be calculated by taking difference between total of all instalments and total cash price. Interest included in each instalment may be calculated in the ratio of amount outstanding.

When interest rate is not given

Ex. Calcutta Transport Ltd. purchased a vehicle on hire-purchase system on 1st January, 2008 Rs.15,000 was paid at spot and rest was paid by four equal half yearly instalments of Rs.20,250 each. The cash price of vehicle was Rs.90,000. Find out the amount of interest included in each instalment.

Solution: Steps involved in showing the above problem:

  • Calculation of total interest.
  • Statement showing distribution ratio of interest in each instalment.
  • Analysis of instalments principal and interest.
  1. Computation of total interest
Image 22

Out of the total amount of Rs.96,000, payable Rs.15,000 down payment was made. So, the balance amount payable is Rs.81,000.

2. Statement showing distribution of interest in each instalment

Image 23

3. Analysis of Instalments Principal and Interest

Image 24

Alternatively, interest may be allocated in the ratio of average amount outstanding. Calculations as per this method will be as under:

Image 25

Note: Ratio of average amount outstanding = (70,875 : 50,625 : 30,375 : 10,125) = 7:5:3:1

Hire Purchase Accounting entries-  instalment amounts given, but cash price not given

Where cash price is not known, the calculation of interest will be based on assumption that portions of cash price included in the instalments are equal.

Rate and cash price not given

M/S. Tours & Travels Pvt. Ltd. sells a vehicle on hire-purchase system. The terms of payment for the sale of the vehicle is Rs.10,000 on delivery, Rs.10,400 at the end of first year, Rs.9,600 at the end of the second year and Rs.8,800 at the end of the third year, inclusive of finance charges (or interest). Calculate amount of interest included in each instalment.

Solution:

Let, the portion of cash price included in instalment is equal and it is P. The portion of interest is taken as I:

First InstalmentsP + 3 I=10,400..(i)
Second InstalmentsP + 2 I=9,600..(ii)
Third InstalmentsP + I=8,800..(iii)
 2P + 3I=18,400..(ii) + (iii)
 P + 3I=10,400..(i)
On deductionP=8,000  
Image 26

Calculation of Cash Price & Interest in Hire Purchase transaction

Sometimes cash price of goods is not given and only instalment with interest & hire-purchase price is given. Under such a situation, calculate the cash price to find out amount of interest included in each instalment.

For computation of cash price, Annuity Tables may be used. Otherwise, arithmetical method is used.

Cash price can be calculated under different situation:

  1. Under Annuity Method,
  2. Under Arithmetical Method,
  3. When instalments are payable at the end of half of year,
  4. When instalments are annual,
  5. When instalments are payable at the end of two years & interest is charged on two yearly rests,
  6. When instalments are payable at the end of two years & interest is calculated on yearly rests.

Ex. On 1st January 2008, India travels Ltd. on hire-purchase basis, purchased a car for Rs.90,000 payable in three equal annual instalments combining principal and interest, the rate of interest was 5% p.a.

Calculate the amount of cash selling price and interest. The present value of an annuity of one rupee for three years at 5% is Rs.2.72325.

Solution: Steps involved in solving the above problem:

  • Calculation of Cash Price.
  • Calculation of Interest.
  1. Calculation of Cash Price:

The present value of annuity of Re.1 paid for 3 years @ 5% = Rs.2.72325.

So, the present value of Rs.30,000 for 3 years = Rs. (30, 000 x 2.72325) = Rs.81,698 (approx).

Then, cash price = Rs.81,698.

2. Calculation of Interest

Image 27

Calculation of Cash Price in Hire Purchase Transaction under Arithmetical Method

  • First take the last instalment and calculate interest included in the instalment.

      Interest = Amount of instalments x {Rate of interest / (100 + Rate of interest)}

  • Then, interest on last but one instalment + principal or cash price in last instalment should be calculated using above formula.
  • Interest in all other instalments should be calculated using above method.

Ex. A acquired on 1st January ,2003 a machine under a Hire-Purchase agreement which provides for 5 half-yearly instalments of Rs.6,000 each, the first instalment being due on 1st July, 2003. Assuming that the applicable rate of interest is 10 per cent per annum, calculate the cash value of the machine. All working should form part of the answer.

Solution:

Image 28

The cash purchase price of machinery is Rs. 25,977.

Ex. X Ltd. purchased a machine on 1st January 2008 on hire-purchase system. He paid Rs.10,000 at spot and then two annual instalments of Rs.10,000 each. The rate of interest was 5% per annum.

Calculate the amount of interest included in instalments and cash price of the machine.

Solution:

  1. Calculation of Cash Price
Image 29

2. Calculation of Hire-Purchase Price

Image 30

Ex. Joint venture Ltd. purchased an asset on hire-purchase system, by paying Rs.2,000 down and Rs.2,500 each at the end of 2nd, 4th and 6th year. Interest is charged @ 5% p.a. on two yearly rests. Calculate Cash Price and amount of interest included in each instalment.

Solution:

Image 32

Ex. S.K. Mittal purchased an asset on hire-purchase system. He paid Rs.3,400 down and Rs.12,000 in three instalments of Rs.4,000 each at the interval of two years. Hire-vendor charges interest at 10% p.a. on yearly rests.

Solution:

Calculation of Cash Price

Image 33

Therefore, total interest for two years = Rs. (10+11) = Rs.21.

Image 34

Hire Purchase Accounting Methods

The method of accounting for hire-purchase transaction depends on the value of sales.

  1. In case of substantial sale value of goods, the accounting method may be-
  2. Assets Accrual Method,
  3. Total Asset value Method/Cash Price Method,
  4. Interest suspense Method.
  5. In case of small sale value of goods, hire-purchase accounting method may be- 
  6. Debtors Method,
  7. Stock and Debtors Method.

Transactions in case of substantial sale value of goods

In case of substantial sale value of goods, transaction entries are recorded in the books of

  • Hire Purchaser,
  • Hire Vendor.

Entries in the books of the Hire-Purchaser

There are three methods of recording hire-purchase transactions in the books of the hire purchaser-

  • Assets Accrual Method,
    • Total Assets Value Method,
    • Interest Suspense Method.
  • Assets Accrual Method: Under this method, the assets account is debited at the time of payment of each instalment, towards principal (i.e. cash price) and interest account is debited with the amount of interest paid included in the instalment. Depreciation will be charged on total cash price. The interest account and depreciation account will be closed by transfer to Profit and Loss Account.

The balance of asset account will appear in the Balance Sheet as ‘Asset (on hire-purchase) less depreciation.’

  • Total Asset Method: Under this method, the total cash price of the asset is debited to the asset account and credited to vendor’s account as if it were an outright purchase. The periodical interest is debited to interest account and credited to vendor’s account. Vendor’s Account is debited with all cash payments made. Depreciation will be charged on total cash price. The interest account and depreciation account will be closed by transfer to Profit and Loss Account.

In the Balance Sheet, the asset account is shown by the balance in Asset Account (i.e. total cash price less depreciation) and the outstanding credit balance in the Vendor’s Account will be deducted therefrom.

  • Interest Suspense Method

Under this method full cash price of the asset and total amount of interest payable are debited to Asset Account and Interest Suspense Account respectively and Vendor’s Account is credited with total amount of all instalments payable. At the end of each year the interest accrued in that year is debited to Interest Account and credited to Interest Suspense Account. Depreciation is charged on total cash price and Interest Account and Depreciation Accounts are transferred to Profit and Loss Account. Asset Account will be shown in the Balance Sheet as shown under Total Assets Value Method. The balance in Interest Suspense Account will represent a debit balance and hence be shown on the Asset side of the Balance Sheet.

  The Journal Entries in the books of the Hire-Purchaser under different methods is shown below: 

Image 35

Note:  In the subsequent years, entries (c.), (d.), (e.), (f.)will be repeated.

Entries in the Books of the Hire-Vendor

  1. Total Asset Method: In this method, debit the Hire-Purchaser and credit Hire-sales Account with the total cash price of the goods. As each instalment falls due, debit the hire-purchaser and credit interest account with the amount of interest on unpaid portion of the cash price. On receipt of cash, debit cash account and credit the hire-purchaser. The interest account will be closed by transfer to Profit & Loss Account. Hire Sales Account will also be closed by transfer to the Trading Account.
  2. Interest Suspense Method: In this method, Hire-Purchaser’s Account is debited by total of all instalments (i.e. total cash price plus total interest) and Hire Sales Account and Interest Suspense Accounts are credited by total cash price and total interest respectively. Interest of each instalment is transferred from Interest Suspense Account to Interest Account.

  The Journal Entries in the books Hire Vendor under different methods is shown below:

Image 36

Note:  In the subsequent years, entries (c.), (d.), (e.), (f.)will be repeated.

The assets and the Balance in Interest Suspense in the Balance Sheet of Purchaser and Vendor are as follows:

Image 37

Hire Purchase Transactions in case of small sale value of goods

The following methods are adopted:

  • Debtors Method,
  • Stock and Debtors Method.

Hire Purchase Transactions Accounting under Debtor’s Method

Where the goods of small value are sold on hire-purchase, the transactions are numerous and the agreement periods vary. In case, the purchasers are treated as individuals and they may record their purchases in their own way they like, but the entries in the books of the seller is described below:

  1. Hire-Purchase Trading Account is prepared.
    • – Separate Memorandum Accounts, Hire-Purchase Day Book and Customers Memorandum or Hire-Purchase Ledger are prepared. In Hire-Purchase Day Book, all hire-purchase sale, agreements are recorded.
    • – This Memorandum Account contains particulars of Date, Folio, Cost Price of Goods Sold, Sale Price of Goods Sold, Number and Amount of Instalments etc.
    • – The Hire-Purchase Ledger (Customer’s Memorandum Ledger) contains personal account of each customer. In this ledger, full hire-purchase price is debited and the instalments paid and hire-purchase price of any goods repossessed by the vendor is credited. These entries are passed on memorandum basis.
  2. The double entry is completed by means of periodical totals to financial books in the following manner:
    1. – The total of the cost-price column of the Hire-Purchase Day Book is debited to Hire-Purchase Trading Account and is credited to Purchase Account. Alternatively, Hire-Purchase Trading Account is debited with the value of goods sold at hire-purchase price and credited to ‘Goods sold on H.P. A/c’. At the end of the year, entry is reversed with the amount of profit.
    2. – The total cash received on account of initial deposit (down payment) and the periodic instalments as well as any instalments due but not paid (Instalments Overdue) are credited to Hire-Purchase Trading Account. The Instalments overdue (due but not paid at the end of the year) are considered as book debt and are therefore treated as sales.
    3. – To ascertain gross profit or loss, the instalments received in cash including overdue instalments are treated as sales, but the instalments that are not due are regarded as ‘Stock out on Hire’. At the end of the year, this stock is valued at cost and is credited to Hire-Purchase Trading Account and carried down as a debit balance to the next period. Alternatively, Hire-Purchase Stock may be shown at hire-purchase price and Stock Reserve Account is shown with the amount of profit in the debit side of Hire-Purchase Trading Account.
    4. – Opening and closing stock with vendor, if any, (shop stock) will also be recorded in the Hire-Purchase Trading Account and then purchases to be debited in this account will be actual purchases. Alternatively, a separate Shop Stock Account is prepared at the balancing date, the cost of the stock out on hire is calculated as:
      [(Amount of Installments not yet due x cost price of sold goods) /Total Hire-Purchase Price]
      – The difference on the Hire-Purchase Trading Account, thus, shows the gross profit or loss to be transferred to the Profit and Loss Account.

Accordingly, Hire-Purchase Trading Account and other relevant accounts are shown as follows:

Image 38
Image 39

Hire Purchase Transactions Accounting under Stock and Debtors Method

  1. In this method, ‘Instalments Due’ (Hire-Purchase Debtors) and ‘Instalments not Due’ (Hire-Purchase Stock) are prepared separately. Profit is ascertained by preparing Hire-Purchase Adjustment Account.
  2. Under this system, following accounts are prepared:
    1. – Hire-Purchase Stock Account.
    2. – Hire-Purchase Debtors Account.
    3. – Hire-Purchase Adjustment Account.
    4. – Goods sold on Hire-Purchase Account.
    5. – Hire-Purchase Stock Reserve Account.
    6. – Shop Stock Account.

The Accounting Entries under this method are shown below:

Image 40

  (12) Balance of Hire Purchase Adjustment A/c

  • Represent Gross Profit/Loss on Hire Purchase Business.
  • Transferred to Profit & Loss A/c.

  (13) Balance of Shop Stock A/c represents Stock at Shop at Cost Price.

  (14) Balance of HP Stock A/c represents Stock with Customer at HP Price.

  (15) Balance of HP Debtors represents instalment due i.e. not received during the period.

Repossession of Goods Accounting on Hire Purchase Payment Default

When the hire-purchaser becomes defaulter in case of paying instalment, the vendor has right to repossess the goods or asset. Sometimes vendor takes back a part of the asset and enters into another agreement with the hire-purchaser. Repossession may be of two types as follows:

  1. Complete/Total Repossession,
  2. Partial Repossession.

Complete / Total Repossession

When vendor takes back total asset, following entries for interest due and depreciation are passed in the books of:

  • Hire-purchaser and
  • Hire- vendor.

In the books of Hire-Purchaser

  1. Under Asset Accrual Method: All entries up to regular payment of instalments are passed in the books of the hire-purchaser in usual manner. Depreciation is charged upto date of default. Thereafter, the balance in the asset account is transferred to Profit and Loss Account.
  2. Under Total Asset Method: All the entries are passed in the books of the hire-purchaser in usual manner. Entry for return of asset will be passed with the amount of balance in vendor’s account (total amount outstanding and payable to the vendor) on the date of default.

Books of Hire Purchaser (Total Repossession)

Journal Entries under different method

Image 41

In the books of Hire-Vendor

In the books of the vendor, Hire-purchaser account will be credited debiting Goods Repossessed Account by the amount of balance in the Hire-Purchaser’s Account.

Books of Hire Vendor

Journal Entries

Image 42

 Partial Repossession : Entries are to be made in the books of:

  • Hire-purchaser and
  • Hire- vendor.

In the books of the Hire-Purchaser

  1. Under Asset Accrual Method: Usual entries will be passed upto regular payment of instalments, charging depreciation, interest due upto the date of default.
  2. Under Total Asset Value Method: Usual entries will be passed upto regular payment of instalments. Entries for charging depreciation and marking interest due upto the date of default will be passed. Entry for return of part asset be passed for the amount at which vendor was take back that part of asset.

Books of Hire Purchaser

1. Asset Accrual Method

The total amount due to the vendor on that date.

       Asset A/c   Dr

[The amount still payable – Value of the  part to vendor of the assets taken over]

             To Hire Vendor A/c  Cr

(Being the amount due to vendor after partial repossession)

In the Asset Account, the depreciated value of the part of asset left with the hire-purchaser will be carried forward. Keeping this balance, the balancing figure in the Asset Account (loss or profit) will be transferred to the Profit and Loss Account.

In case of Loss:

Profit and Loss A/c  Dr          

To Asset A/c  Cr

 (Loss on asset)

2. Total Asset Value Method

1. When the asset is taken by the vendor at the agreed value.

    Hire Vendor A/c (agreed value) Dr

           To Asset A/c  (Book value)  Cr

(Being the asset is taken over at agreed value.)            

Now the balance in the Vendor Account will show amount payable to the hire-vendor after repossession of part of the asset. In the Asset Account, the carried forward balance will be the depreciated value of the part of asset left with the hire-purchaser. The difference between the agreed value and book value (profit or loss) will be transferred to the Profit and Loss Account.

2. In case of Loss:

Profit & Loss Account  Dr        

     To Asset Account  Cr

(Being loss on repossession of goods)

In the Books of Hire Vendor

Journal Entries

1. On repossession of goods:

     Goods Repossessed A/c Dr

            To Hire Purchaser A/c  Cr

If the vendor incurs any expenses on repairing or overhauling on repossessed goods:

      Goods Repossessed A/c  Dr

            To Bank/Cash A/c  Cr

Note:  The Hire Vendor may sell such goods at profit or loss. In this case the journal entry will be similar to case of Total Repossession.

Hire-Purchase Transactions Special Accounting treatment

  1. When Hire Purchaser pays insurance premium together with instalment,
  2. When the Hire- Purchaser buys through financial institution and sales,
  3. When hire-purchaser transfers asset to other party during hire-purchase period.

When Hire Purchaser pays insurance premium together with instalment

Vendor may persuade hire-purchaser to pay insurance premium on assets together with the payment of instalment. As the right of ownership is held by the vendor, the payment of premium will be made to the insurance company by the vendor, but he can realize the premium amount from the hire-purchaser under agreement. The hire-purchaser will provide the amount of premium with the amount of instalment. He will pass the following journal entry.

Under Asset Accrual-Method

Asset A/c  Dr.

Interest A/c  Dr.

Insurance Premium A/c  Dr.

   To Hire Vendor  Cr

(Amount of cash price portion, interest and insurance premium included in the instalment.)

Under Total Asset Method

Interest A/c    Dr.

Insurance Premium A/c  Dr.

    To Hire Vendor  Cr

(Amount of interest and insurance premium included in the instalment.)

Note: Other entries will remain same and at the end of year Insurance Premium Account will also be transferred to Profit & Loss A/c.

Hire- Purchaser buying through financial institution

When hire-purchase price is provided by a financial institution, through finance to the original vendor and instalments are to be paid by hire-purchaser to the institution, then in the books of hire-purchaser, the financial institution will be treated as vendor.

When the asset sold by the hire-purchaser and amount due to financial institution is paid, the Asset Account will be credited by the sale proceeds and amount paid to financial institution will be debited to Asset A/c under Asset Accrual Method. If accounts are kept under Total Asset Method, the Financial institution’s Account will be debited instead of Asset Account.   

Ex. On 1st January 2005, X Ltd. acquired a machine of which the cash price was Rs.7,540. The purchase of machine was financed by XYZ finance Corporation Ltd., to whom Rs.3,000 was payable by X Ltd., on 1st January 2005 and instalments (including interest) of Rs.1,800 on 31st December, 2005, 2006 and 2007 respectively. The rate of interest was 10% p.a.

On 1st January 2007, the machine was sold for Rs.6,000 and the debt of the XYZ Finance Corporation Ltd. was discharged on the same date.

Show the accounts of XYZ Finance Corporation Ltd. and the Machine Account in the books of X Ltd., writing off depreciation at 10% on diminishing balance.

Solution: Steps involved in solving the above problem-

  • Calculation of Interest.
  • Preparation of Machinery A/c.
  • Preparation of XYZ Finance Corporation Ltd. A/c.
  1. Calculation of Interest
Image 43

 Total payment = (3,000 + (1,800 x 3) = 8,400 i.e. Cost + interest = 7,540 + 860 = Rs.8,400

2. Machinery Account

Image 44

3. XYZ Finance Corporation Ltd.

Image 45

When hire-purchaser transfers asset to other party during hire-purchase period

The hire-purchaser, after paying certain instalments to vendor, may transfer the asset to another party with the concurrence of the vendor. The subsequent purchaser will be obliged to pay remaining instalments to the vendor along with certain agreed amount to be paid to the original purchaser. The entry in the books of subsequent purchaser or transferee will be as below (under total asset method):

Asset Account                      Dr.

To Transferor (Original hire-purchaser)

To Vendor’s Account (outstanding instalments payable to the vendor).

Ex. X agreed with Y to purchase a boat under hire-purchase system on 1st January 2007. It was agreed to pay half-yearly instalments of Rs. 738.39 on 30th June and 31st December. The cash price was Rs. 5,000 @ of interest was 6% p.a. on half yearly rests.

On Jan. 1, 2008 after paying two instalments X transferred his right under agreement to Z on a consideration of Rs.1,500. Z paid this amount to X immediately and agreed to pay remaining instalments to Y on due dates.

Pass journal entries in the books of Z on Jan., 1 and June 30, 2008. Books are closed on 30th June. Depreciation was to be allowed at 10% p.a.

Solution: Steps involved in solving the above problem-

  • Calculation of Interest.
  • Passing Journal Entries.

Calculation of Interest

Image 46

Total amount = Rs.(1,194.43 + 282.35) = Rs.1476.78

1. Books of Z

Image 47

Accounting of Hire Purchase Transaction – Practical Examples

Accounting entries under 1. Asset Accrual Method, 2. Total Asset value Method 3. Interest Suspense Method

Ex. On 1st January 2007 Toyota Pvt. Ltd. purchase a car from Ford Industries Ltd. on hire-purchase basis. The cash price being Rs.75,000, Rs.20,000 was paid on the signing of the contract and the balance in three annual instalments of Rs.20,000 each of 31st December each year. Interest is charged at 5 percent per annum. Depreciation was written off at the rate of 5 percent per annum on the reducing instalment system.

Give journal entries and ledger accounts in the books of Toyota Pvt. Ltd. and Ford Industries. Whose accounting year ends on 31st Dec. every year.

Solution: Steps involved in solving the above problem:

  • Calculation of Interest.
  • Calculation of Depreciation.
  • Passing journal entries in the books of purchaser under Asset Accrual Method.
  • Preparing necessary ledger accounts in the books of purchaser.
  • Passing journal entries in the books of purchaser under Total Asset Value Method.
  • Preparing necessary ledger accounts in the books of purchaser.
  • Passing journal entries in the books of vendor.
  • Passing journal entries in the books of purchaser under Interest Suspense Method.
  • Preparing necessary ledger accounts in the books of purchaser.
  • Passing journal entries in the books of vendor.

Working Details :

  1. Calculation of Interest
Image 48

2.  Calculation of Depreciation:

Image 49

3. First Method: Asset Accrual Method

Books of Toyota Pvt. Ltd. (Purchaser)

Journal Entries

Image 50
Image 51

4.    Ledger (In the books of Purchaser)

Car Account

Image 52

Ford Industries Ltd. (Vendors)

Image 53

Interest Account

Image 54

Depreciation Account

Image 55

5. Second Method: Total Asset value Method

Books of Toyota Pvt. Ltd. (Purchaser)

Journal Entries

Image 56
Image 57

6.  Ledger

Car Account

Image 58

Ford Industries Account

Image 59

Note: Depreciation Account and Interest Account will be prepared according to first method.

7. Journal Entries in the books of Ford Industries Ltd. (Vendors)

Image 60

8. Third Method: Interest Suspense Method
Books of Toyota Pvt. Ltd.
Journal Entries

Image 61
Image 62

9.  Ledger

Car Account

Image 63

Ford Industries A/c

Image 64

Interest suspense A/c

Image 65

10. Journal Entries in the books of Ford Industries Ltd. (Vendors)

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Hire Purchase Trading A/c & P/L A/c – Practical Example

Ex. Welwash (Pvt.) Ltd. sells washing machines for outright cash as well as on hire-purchase basis. The cost of a washing machine to the company is Rs.10,500. The company has fixed cash price of the machine at Rs.12,300 and hire-purchase price at Rs.13,500 payable as to Rs.1,500 down and the balance in 24 equal monthly instalments of Rs.500 each.

On 1st April, 2000 the company had 26 washing machines lying in its showroom. On that date 3 instalments had fallen due, but not yet received and 675 instalments were yet to fall due in respect of machines lying with the hire-purchase customers.

During the year ended 31st March, 2001 the company sold 130 machines on cash basis and 80 machines on hire-purchase basis. After paying five monthly instalments, one customer failed to pay subsequent instalments and the company had to repossess the washing machine. After spending Rs.1,000 on it, the company resold it for Rs.11,500.

On 31st March, 2001 there were 21 washing machines in stock, 810 instalments were yet to fall due and 5 instalments had fallen due, but not yet received in respect of washing machines lying with the hire- purchase customers. Total selling expenses and office expenses including depreciation on fixed assets totaled Rs.1,60,000 for the year.

You are required to prepare for the Accounting year ended 31st March, 2001:

  • Hire-purchase Trading Account, and
  • Trading and Profit & Loss Account showing net profit earned by the company after making provision for Income-tax @ 35%.

Solution: Steps involved in solving the above problem :

  • Calculation of instalments collected.
  • Calculation of Purchases of Washing Machines.
  • Calculation of Stock Reserve and Loading.
  • Preparation of Hire-Purchase Trading A/c.
  • Preparation of Trading and Profit & Loss A/c.

Working Details:

1.Calculation of instalments collected

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2. Calculation of Purchases of Washing Machines

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3. Calculation of Stock reserve and Loading

ParticularsRs.
Hire-Purchase price of a Washing Machine
Less; Cost of a Washing Machine		13,500
10,500
Profit on H.P. sale of a Washing Machine3,000

Therefore, Stock Reserve on Opening Hire-Purchase stock = Rs.(3,37,500 x 3,000/13,500)

= Rs. 75,000.

Stock Reserve on Closing Hire-Purchase stock = Rs. (4,05,000 x 3,000/13,500) = Rs.90,000.

Loading on goods sold on Hire-Purchase = Rs. (10,80,000 x 3,000/13,500) = Rs. 2,40,000.

4. Books of Welwash (Pvt.) Ltd.

Hire Purchase Trading Account for the year ended 31st March, 2001

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5.  Trading and Profit and Loss Account for the year ended 31.3.01

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Hire Purchase Trading A/c & P/L A/c – Practical Example

Memorandum Stock at Shop A/c, Memorandum Hire Purchase Stock A/c & Memorandum Hire Purchase Debtors A/c

Ex. ABC Ltd. sells goods on Hire Purchase by adding 50% above cost.

From the following particulars prepare Hire Purchase Trading Account to reveal the profit for the year ended on 31.3.2005:

  Rs.
1.4.2004Instalments due but not collected10,000
1.4.2004Stock at shop (at cost)36,000
1.4.2004Instalment not yet due18,000
31.3.2005Stock at shop40,000
31.3.2005Instalments due but not collected18,000
Other Details :
 Total instalments became due1,32,000
 Goods purchased1,20,000
 Cash received from customers1,21,000

Goods on which due instalments could not be collected were repossessed and valued at 30% below original cost. The vendor spent Rs.500 getting goods overhauled and then sold for Rs. 2,800.     

Solution: Steps involved here solving the problem-

  • Working detail of Memorandum Stock at Shop A/c.
  • Working detail of Memorandum Hire Purchase Stock (Instalment not yet due) A/c.
  • Working detail of Memorandum Hire Purchase Debtors (due instalment but not collected) A/c.
  • Working detail of Goods Repossessed A/c.
  • Calculation of Loading on Stock.
  • Calculation of Loss on Repossession.
  • Preparing Hire Purchase Trading A/c.

Working Details:

  1. Memorandum Stock at Shop A/c
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2. Memorandum Hire purchase Stock (Instalment not yet due)

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Note: As the goods are sold out on 50% above cost.

3. Memorandum Hire Purchase Debtors (due instalment but not collected) A/c

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4. Goods Repossessed A/c

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5. Calculation of Loading on stock

    Let cost=Rs.100, profit =Rs.50

    Therefore, selling price is Rs.(100+50)= Rs.150

    So, proportion of profit on selling price= 50/150= 1/3rd

    Loading on opening H.P Stock=1/3rd of Rs.18,000=Rs.6,000

    Loading on closing H.P Stock=1/3rd of Rs.60,000 (Wn 2)=Rs.20,000

    Loading on goods sold on H.P= 1/3rd of Rs.1,74,000 (Wn 2)= Rs.58,000

6. Calculation of Loss on Repossession

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7. Hire Purchase Trading Account for the year ended 31.3.2005

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Hire Purchase Trading A/c & P/L A/c – Practical Example

Stock and Debtors Method

Ex. Wye sells goods on Hire- purchase at cost plus 50%. Prepare Hire – purchase Trading A/c from the information given below:

 Rs.
Stock with customers on hire – purchase price (opening)1,62,000
Stock in hand at shop (opening)3,24,000
Installment overdue (opening)1,35,000
Purchases during the year10,80,000
Goods re – possessed ( instalments  not due Rs.36,000)9,000
Stock at shop excluding re – possessed goods (closing)3,60,000
Cash received during the year10,35,000
Installments overdue (closing)1,62,000

The vendor spent Rs.2,000 on goods re – possessed and then sold it for Rs.15,000.

Solution: Steps involved here solving the problem-

  • Calculation of shop Stock.
  • Calculation of Hire Purchase Debtors.
  • Calculation of Hire Purchase Stock.
  • Calculation of Loading on Stock.
  • Preparation of Hire Purchase Trading Account.

1.Shop Stock Account

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2. H.P Debtors Account

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3. H.P Stock Account

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4. Calculation of Loading on stock

Closing H.P Stock Reserve6,30,000 x (50/150)Rs.2,10,000
Opening  H.P Stock Reserve1,62,000 x (50/150)Rs.54,000
Loading on goods sold on HP15,66,000 x (50/150)Rs.5,22,000

It has been assumed that cash received during the year of Rs.10,35,000 did not include sale proceeds of re-possessed goods Rs.15,000.

5. In the books of WYE
Hire Purchase Trading Account

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