Hire Purchase and Instalment Sale Transactions

5/19/2018 Hire Purchase and Instalment Sale Transactions

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11Hire Purchase and Instalment Sale

Transactions

Learning Objectives

After studying this chapter, you will be able to:

Understand the salient features and nature of Hire purchase transactions.

Journalise the Hire purchase entries both in the books of hire purchaser and the hire

vendor.

Learn various methods of accounting for hire purchase transactions.

Ascertain various missing values, required while accounting the hire purchase

transactions, on the basis of given information.

Calculate and record the value of repossessed goods and also to calculate the profiton re-sale of such goods.

Draw the Hire-purchase Trading Account and calculate the profit on such

transactions.

Evaluate the profit on hire purchase of goods of small value.

Understand the instalment payment system and also how it is different from hire

purchase transactions.

1. Introduction

With an increasing demand for better life, the consumption of goods has been on theexpanding scale. But, this has not been backed up by adequate purchasing power,transforming it into effectual demand, i.e., actual sale at set or settled prices. This has created

the market for what is called hire purch ase.

When a person wants to acquire an asset but is not sure to make payment within a stipulated

period of time he may pay in instalments if the vendor agrees. This enables the purchaser touse the asset while paying for it in instalments over an agreed period of time. This type of abusiness deal is known as hire purchase transaction. Here, the customer pays the entire

The Institute of Chartered Accountants of India


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Hire Purchase and Instalment Sale Transactions 11.2

amount either in monthly or quarterly or yearly instalments, while the asset remains theproperty of the seller until the buyer squares up his entire liability. For the seller, the agreedinstalments include his interest on the assets given on credit to the purchaser. Therefore,

when the total amount is paid in instalments over a period of time is certainly higher than the

cash down price of the article because of interest charges. Obviously, both the parties gain inthe bargain. By virtue of this, the purchaser has the right of immediate use of the asset withoutmaking down right payment from his own, by this, he gets both credit and product from the

same seller. From sellers view point, he derives the benefit by increase in sale and also he

recovers his own cost of credit.

2. Nature of Hire Purchase Agreement

Under the Hire Purchase System the Hire Purchaser gets possession of the goods at the

outset and can use it, while paying for it in instalments over a specified period of time as perthe agreement. However, the ownership of the goods remains with the Hire Vendor until the

hire purchaser has paid all the instalments. Each instalment paid by the hire purchaser istreated as hire charges for using the asset. In case he fails to pay any of the instalments (even

the last one) the hire vendor will take back his goods without compensating the buyer, i.e., thehire vendor is not going to pay back a part or whole of the amount received through

instalments till the date of default from the buyer.

3. Special Features of Hire Purchase Agreement

1. Possession: The hire vendor transfers only possession of the goods to the hirepurchaser immediately after the contract for hire purchase is made.

2. Installments:The goods are delivered by the hire vendor on the condition that a hirepurchaser should pay the amount in periodical instalments.

3. Down Payment:The hire purchaser generally makes a down payment i.e an amount on

signing the agreement.

4. Constituents of Hire purchase instalments: Each instalment consists partly of a

finance charge (interest) and partly of a capital payment.

5. Ownership:The property in goods is to pass to the hire purchaser on the payment of the

last instalment and exercising the option conferred upon him under the agreement.

6. Repossession:In case of default in respect of payment of even the last instalment, thehire vendor has the right to take the goods back without making any compensation.

4. Terms used in Hire Purchase Agreements

1. Hire Vendor: Hire vendor is a person who delivers the goods alongwith its possession

to the hire purchaser under an hire purchase agreement.



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11.3 Acc

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In this case, we will have to calculate the interest with the help of the total amount due on hirepurchase price since the cash price is not known. For the purpose of calculating the interest,the following steps should be followed:

Step 1: Calculate the ratio between interest and the amount due with the help of the

following formula:

interestofRate100

interestofRatedueamountandinterestofRatio

+=

Step 2: Calculate the interest included in the last instalment by applying the followingformula:

Interest = Total amount due at the time of instalment x Ratio of interest and amount

due (as calculated in step 1)

Step 3: Subtract the interest (as calculated in step 2) from this instalment to get the amount

of outstanding cash price at the time of last instalment.

Step 4: Add the cash price calculated in Step 3 to the amount of instalment due at the endof the third year.

Step 5: Calculate the interest on the entire sum (cash price included in the 4thinstalment +amount of 3rdinstalment). Deduct this interest from the total amount due at the end

of 3rdyear to get the outstanding cash price at the time of 3rdinstalment.

Step 6: Add the cash price calculated in step 5 to the amount of instalment due at the endof 2nd year.

Step 7: Calculate the interest on the entire sum so obtained in Step 6. Deduct this interestfrom the total amount due at the end of 2ndyear to get the outstanding cash price at

the time of 2ndinstalment.

Step 8: Add the cash price calculated in Step 7 to the amount of instalment due at the endof 1styear.

Step 9: Calculate the interest on the entire sum so obtained in Step 8. Deduct this interest

from the total amount due at the end of 1styear to get the outstanding cash price at

the time of 1stinstalment.

Step 10: Add the cash price calculated in Step 9 to the amount of down payment, if any. Thesum so obtained will be the total cash price.

Illustration 1

Asha purchased a truck on hire purchase system. As per terms he is required to pay

`70,000 down, ` 53,000 at the end of first year, `49,000 at the end of second year and

`55,000 at the end of third year. Interest is charged @ 10% p.a.

You are required to calculate the total cash price of the truck and the interest paid with each

instalment.



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11.5 Accounting

Solution

(1) Ratio of interest and amount due =Rateofinterest 10 1

11100 Rateof interest 110= =

+

(2) Calcul ation of Interest and Cash Price

No. of

instalments

Amount due at the

time of instalment

Interest Cash price

[1] [2] [3] [4]

3rd 55,000 1/11 of `55,000 = 5,000 50,000

2nd *99,000 1/11 of `99,000 = `9,000 90,000

1st **1,43,000 1/11of `1,43,000 = `13,000 1,30,000

Total cash price = `1,30,000+ 70,000 (down payment) =`2,00,000.

*`50,000 + 2ndinstalment of `49,000 = `99,000.

**`90,000 + 1stinstalment of ` 53,000 = `1,43,000.

Illustration 2

A acquired on 1st January, 2012 a machine under a Hire-Purchase agreement which providesfor 5 half-yearly instalments of ` 6,000 each, the first instalment being due on 1st July, 2012.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

Statement show ing cash value of the machine acquired on hi re-purchase basis

InstalmentAmount

Interest @ 5% halfyearly (10% p.a.) =

5/105 = 1/21(in each instalment)

Principal Amount (ineach instalment)

` ` `

5th Instalment 6,000 286 5,714Less:Interest (286)

5,714

Add:4th Instalment 6,00011,714 558 5,442

Less:Interest (558) (11,1565,714)11,156

Add:3rd instalment 6,00017,156 817 5,183

Less:Interest (817) (16,33911,156)16,339

Add:2nd instalment 6,000



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22,339 1,063 4,937Less:Interest (1,063) (21,27616,339)

21,276Add:1st instalment 6,000

27,276 1,299 4,701Less:Interest (1,299) (25,97721,276)

25,977 4,023 25,977

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

5.2 Calculation of Total Cash Price with the help of Annu ity Table

Cash pri ce = Down paym ent + Present value of inst alments

Present value of instalments is calculated as follows:

(a) If present value of an annuity of `1 for a given period, at given rate of interest, is given

Present value of instalments = Annual instalments x Present value of an annuity of `1 for agiven period at given rate of interest

= Annual instalment x( )

( )

n

n

1 r 1

r 1 r

+

+

(b) If annuity to recover ` 1 during a given period at given rate of interest is given

= Annual instalment x

( )

( )

n

n

r 1 r

1 r 1

+

+

6. Ascertainment of Interest

We know that the hire purchase price consists of two elements: (i) cash price; and (ii) interest.

Cash price is the capital expenditure incurred for the acquisition of an asset and (ii) interest is the

revenue expense for the delay in making the full payment. Ascertainment of any of these two givesthe answer for the other, e.g., if we ascertain the total amount of interest, it becomes very simple to

ascertain the cash price just by deducting the amount of interest from the hire purchase price.

Interest is charged on the amount outstanding. Therefore, if the hire purchaser makes a down

payment on signing the contract, it will not include any amount of interest. It should be notedthat though the instalments of a hire purchase agreement may be equal, the interest element

in each instalment is not the same.

At the time of calculating interest, students may face the following two situations:

(a) When the cash price, rate of interest and the amount of instalments are given; and

(b) When the cash price and the amount of instalments are given, but the rate of interest is not given.

Now, let us consider the above two situations.



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11.7 Accounting

6.1 When the cash price, rate of interest and the amount of inst alments aregiven

In this situation, the total amount of interest is to be ascertained first. It is the differencebetween the hire purchase price (down payment + total instalments) and the cash price. To

calculate the amount of interest involved in each instalment the following steps are followed:

Step 1: Deduct down payment from the cash price. Calculate the interest at the given rate on

the remaining balance. This represents the amount of interest included in the first

instalment.

Step 2: Deduct the interest of Step 1 from the amount of first instalment. The resultant figure

is the cash price included in the first instalment.

Step 3: Deduct the cash price of the 1stinstalment (Step 2) from the balance due after downpayment. It represents the amount outstanding after the 1stinstalment is paid.

Step 4: Calculate the interest at the given rate on the balance outstanding after the 1st

instalment. Deduct this interest from the amount of the 2ndinstalment to get the cash

price included in the 2ndinstalment.

Step 5: Deduct the cash price of the 2ndinstalment (Step 4) from the balance due after the 1st

instalment. It represents the amount outstanding after the 2ndinstalment is paid.

Repeat the above steps till the last instalment is paid.

Illustration 3

Om Ltd. purchased a machine on hire purchase basis from Kumar Machinery Co. Ltd. on thefollowing terms:

(a) Cash price ` 80,000

(b) Down payment at the time of signing the agreement on 1.1.2013 ` 21,622.

(c) 5 annual instalments of ` 15,400, the first to commence at the end of twelve months

from the date of down payment.

(d) Rate of interest is 10% p.a.

You are required to calculate the total interest and interest included in cash instalment.

Solution:

Calculation of interest

Total (

) Interest in each

instalment (1)

Cash price in

each instament

(2)

Cash Price 80,000

Less : Down Payment 21,622 Nil `21,622



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Balance due after down

payment

58,378

Interest/Cash Price of 1st

instalment

- `58,378 x10/100 = `5,838 `15,400

`5,838= ` 9,562

Less : Cash price of 1stinstalment (9,562)

Balance due after 1st instalment 48,816

Interest/cash price of 2nd

instalment

- `48,816 x 10/100 = `4,882 `15,400 -

`4,882= `10,518

Less: Cash price of 2ndinstalment (10,518)

Balance due after 2nd instalment 38,298

Interest/Cash price of 3rd

instalment

- `38,298 10/100 = `3,830 `15,400 -

`3,830= `11,570

Less: Cash price of 3rdinstalment (11,570)

Balance due after 3rd instalment 26,728

Interest/Cash price of 4th

instalment

- `26,728 x10/100 = `2,672 `15,400 -

`2,672 = `12,728

Less : Cash price of 4thinstalment (12,728)

Balance due after 4th instalment 14,000

Interest/Cash price of 5th

instalment

- `14,000 x10/100 = 1,400 `15400

`1,400= 14,000

Less : Cash price of 5thinstalment (14,000)

Total Nil `18,622 `80,000

Total interest can also be calculated as follow:

(Down payment + instalments) Cash Price = ` [21,622 +(15400 x 5)] ` 80,000 =

`18,622

6.2 When the cash price and the amount of instalments are given, but the rate of

interest is not givenWhen the rate of interest is not given, but the cash price and the amount of instalments are

given, the following steps are followed to calculate the interest:

Step 1: Calculate the total interest by deducting the cash price from the hire purchase price(i.e., down payment + amount of instalment x number of instalments).

Step 2: Deduct down payment from the hire purchase price.



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11.9 Accounting

Step 3: Calculate the amount of outstanding balance of the hire purchase price at thebeginning of each year.

Step 4: Calculate the ratio of outstanding balance of Step 3.

Step 5: Calculate the amount of interest of each instalment on the basis of the ratio of Step 4.

Illustration 4

A Ltd. purchases a plant on hire purchase basis for ` 1,00,000 and makes the payment in the

following order:

Down payment `20,000,

the 1stinstalment after one year `40,000;

the 2ndinstalment after two years `20,000

and the last instalment after three years.

The cash price of the plant is `86,000.

You are required to calculate: (i) the total interest and (ii) the interest included in each

instalment.

Solution :

(i) Total interest = Hire Purchase price Cash price = ` 1,00,000 ` 86,000 =

`14,000

(ii) Hire purchase price outstanding at the beginning of each year.

`

Hire purchase price 1,00,000

Less: Down payment (20,000)

(a) Hire Purchase Price outstanding at the beginning of the 1styear 80,000

Less1stinstalment (40,000)

(b) Hire Purchase price outstanding at the beginning of the 2ndyear 40,000

Less: 2ndinstalment (20,000)

(c) Hire Purchase Price outstanding at the beginning of the 3rdyear 20,000

Less: 3rd

instalment (20,000)Nil

Ratio of (a) : (b) : (c) = 80:40:10 or 4:2:1

Interest of 1stinstalment = 4/7 x `14,000 = `8,000. Interest of 2ndinstalment = 2/7 x`14,000 = `4,000.

And interest of 3rdinstalment = 1/7 x `14,000 = `2,000



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6.3 When the amount of instalment is given but cash pri ce and rate of interestnot given

The difference between any two successive instalments represents the least amount ofinterest charged in the last year. The amount of interest for each year is calculated as follows:

Interest for 1styear = Difference between two successive instalments x (N)

Interest for 2ndyear = Difference between two successive instalments x (N-1)

Interest for 3rdyear = Difference between two successive instalments x (N-2)

Interest for 4thyear = Difference between two successive instalments x (N-3)

Interest for 5thyear onwards = Difference between two successive instalments x (N-4)

Note N denotes the number of instalments.

Illustration 5

X Ltd. purchased a machine on hire purchase basis from Y Ltd. on the following terms: (a)Cash Down payment- `1,58,500 (b) Four instalments of `2,21,900, `2,06,050, `1,90,200and `1,74,350 at the end of the 1styear, 2ndyear, 3rdyear and 4thyear respectively. (c) Thepayment of cash price in each instalment is uniform. Compute the amount of interest and totalcash price of the machine.

Solution

Difference between any two successive instalments represents the least amount of interestcharged in the last year i.e. ` 2,21,900 ` 2,06,050 = `15,850.

Thus, interest for the 3rdyear = Least amount of interest x 2

i.e. ` 15,850 x 2 = ` 31,700.

Thus, interest for the 2ndyear = ` 15,850 x 3 = `47,550

Thus, interest for the 1styear = ` 15,850 x 4 = ` 63,400

Thus, allocation of instalment between cash price and interest is as follows:

Year Instalment (`) Interest (`) Cash Price (`)

1 2,21,900 63,400 1,58,500

2 2,06,050 47,550 1,58,500

3 1,90,200 31,700 1,58,500

4 1,74,350 15,850 1,58,500

Total 7,92,500 1,58,500 6,34,000

Total cash price = ` 6,34,000 + ` 1,58,500 = ` 7,92,500.

7. Account ing Arrangements of Hire Purchase Transaction

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



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11.11 Acc

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12/52


Accounting

To have proper accounting record, one should know: (1) Date of purchase of the asset; (2)Cash price of the asset; (3) Hire purchase price of the asset; (4) The amount of down

payment; (5) Number and amount of each instalment; (6) Rate of interest; (7) Method and rateof depreciation; (8) Date of payment of every instalment; and (9) Date of closing the books of

account.

Journal Entries

1. On entering into the agreement

Asset Account Dr. [Full cash price]

To Hire Vendor Account2. When down payment is made

Hire Vendor Account Dr. [Down payment]

To Cash/Bank Account

3. When an instalment becomes due

Interest Account Dr. [Interest on outstanding balance]

To Hire Vendor Account

4. When an instalment is paid

Hire Vendor Account Dr. [Amount of instalment]

To Bank Account

5. When depreciation is charged on the asset

Depreciation Account Dr. [Calculated on cash price]

To Asset Account

6. For closing interest and depreciation account

Profit and Loss Account Dr.

To Interest Account

To Depreciation Account

However, a firm may maintain Provision for Depreciation A/c instead of charging depreciationto Hire Purchase Asset A/c. In such case the journal entry is:

Profit and Loss A/c Dr.

To Provision for Depreciation for Asset on Hire Purchase A/c

and naturally, Asset on Hire Purchase is shown at its historical cost.



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11.13 Accounting

Disclosure in the balance sheet

Assets

Fixed Assets :

Asset (at cash price) xxxxxxx.xx

Less :Depreciation xxxx.xx

xxxxxxx.xx

Creditors :

Hire Purchase Creditors :

Balance in hire vendor's A/c xxxxx.xx

Instalment due xxxxx.xx

Instalment not yet due xxxxx.xx

Illustration 6

On January 1, 2008 HP M/s acquired a pick-up Van on hire purchase from FM M/s The terms

of the contract were as follows:

(a) The cash price of the van was `1,00,000.

(b) `40,000 were to be paid on signing of the contract.

(c) The balance was to be paid in annual instalments of `20,000 plus interest.

(d) Interest chargeable on the outstanding balance was 6% p.a.

(e) Depreciation at 10% p.a. is to be written-off using the straight-line method.You are required to:

(a) Give Journal Entries and show the relevant accounts in the books of HP M/s fromJanuary 1, 2010 to December 31, 2012; and

(b) Show the relevant items in the Balance Sheet of the purchaser as on December 31,

2010 to 2012.

Solution

In the books of HP M/s

Journal

Date Particulars Dr. Cr.

` `

2010 Pick-up Van A/c Dr. 1,00,000

Jan. 1 To FM M/s A/c 1,00,000

(Being the purchase of a pick-up van on hire

purchase from FM M/s)

FM M/s A/c Dr. 40,000



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To Bank A/c 40,000

(Being the amount paid on signing the H.P. contract)

Dec. 31 Interest A/c Dr. 3,600

To FM M/s A/c 3,600

(Being the interest payable @ 6% on `60,000

FM M/s A/c (`20,000+`3,600) Dr. 23,600

To Bank A/c 23,600

(Being the payment of 1stinstalment along withinterest)

Depreciation A/c Dr. 10,000

To Pick-up Van A/c 10,000

(Being the depreciation charged @ 10% p.a. on

`1,00,000)

Profit & Loss A/c Dr. 13,600

To Depreciation A/c 10,000

To Interest A/c 3,600

(Being the depreciation and interest transferred toProfit and Loss Account)

2011 Interest A/c Dr. 2,400

Dec. 31 To FM M/s A/c 2,400

(Being the interest payable @ 6% on `40,000)

FM M/s A/c (`20,000 + `2,400) Dr. 22,400

To Bank A/c 22,400

(Being the payment of 2ndinstalment along withinterest)



(Being the depreciation charged @ 10% p.a.)




(Being the depreciation and interest charged toProfit and Loss Account)



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11.15 Accounting

2012 Interest A/c Dr. 1,200

Dec. 31 To FM M/s A/c 1,200

(Being the interest payable @ 6% on `20,000)

FM M/s A/c (`20,000 + `1,200) Dr. 21,200

To Bank A/c 21,200

(Being the payment of final instalment along withinterest)



(Being the depreciation charged @ 10% p.a. on`1,00,000)




(Being the interest and depreciation charged toProfit and Loss Account)

Ledgers in the boo ks of HP M/s

Pick-up Van Account

Date Particulars ` Date Particulars `

1.1.2010 To FM M/s A/c 1,00,000 31.12.2010 By Depreciation A/c 10,000

31.12.2011 By Balance c/d 90,000

1,00,000 1,00,000

1.1.2011 To Balance b/d 90,000 31.12.2011 By Depreciation A/c 10,000

31.12.2011 By Balance c/d 80,000

90,000 90,000

1.1.2012 To Balance b/d 80,000 31.12.2012 By Depreciation A/c 10,000

31.12.2012 By Balance c/d 70,000

80,000 80,000

FM M/s Account


1.1.10 To Bank A/c 40,000 1.1.10 By Pick-up Van A/c 1,00,000

31.12.10 To Bank A/c 23,600 By Interest c/d 3,600

31.12.10 To Balance c/d 40,000

1,03,600 1,03,600



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31.12.11 To Bank A/c 22,400 1.1.11 By Balance b/d 40,000

31.12.11 To Balance c/d 20,000 31.12.11 By Interest A/c 2,400

42,400 42,400


31.12.12 By Interest A/c 1,200

21,200 21,200

Depreciation Account


31.12.2010 To Pick-up Van A/c 10,000 31.12.2010 By Profit & Loss A/c 10,000



Interest Accoun t


31.12.2010 To FM M/s A/c 3,600 31.12.2010 By Profit & Loss A/c 3,600



Balance Sheet of HP M/s as at 31st December, 2010

Liabilities `

Assets `

FM M/s 40,000 Pick-up Van 90,000


Liabilities ` Assets `

FM M/s 20,000 Pick-up Van 80,000



FM M/s 20,000 Pick-up Van 70,0008.1.2 Interest suspense method

Under this method, at the time of transfer of possession of asset, the total interest unaccruedis transferred to interest suspense account. At latter years, as and when interest becomes

due, interest account is debited and interest suspense account is credited.



17/52

11.17 Accounting

Journal Entries

1. When the asset is acquired on hire purchase

Asset Account Dr. [Full cash price]


2. For total interest payment is made

H.P. Interest Suspense Account Dr. [Total interest]


3. When down payment is made

Hire Vendor Account Dr.

To Bank Account

4. For Interest of the relevant period

Interest Account Dr. [Interest of the relevant period]

To H.P. Interest Suspense Account

5. When an instalment is paid

Hire Vendor Account Dr.

To Bank Account6. When depreciation is charged on the asset

Depreciation Account Dr. [Calculated on cash price]

To Asset Account

7. For closing interest and depreciation account

Profit and Loss Account Dr.

To Interest Account

To Depreciation Account

Illustration 7

In illustration 6 assume that the hire purchaser adopted the interest suspense method forrecording his hire purchase transactions. On this basis, prepare H.P. Interest Suspense

Account, Interest Account and FM M/s Accounts and Balance Sheets in the books of hire

purchaser.



18/52


Solution

H.P. Interest Suspense Ac count


1.1.2010 To FM M/s A/c (W.N.) 7,200 31.12.2010 By Interest A/c 3,600

31.12.2010 By Balance c/d 3,600

7,200 7,200

1.1.2011 To Balance b/d 3,600 31.12.2011 By Interest A/c 2,400

31.12.2011 By Balance c/d 1,200

3,600 3,6001.1.2012 To Balance b/d 1,200 31.12.2012 By Interest A/c 1,200

Interest Account


31.12.2010 To H.P. InterestSuspense A/c

3,600 31.12.2010 By Profit & Loss A/c 3,600

31.12.2011 To H.P. Interest

Suspense a/c

2,400 31.12.2011 By Profit & Loss A/c 2,400

31.12.2012 To H.P. Interest

Suspense A/c

1,200 31.12.2012 By Profit & Loss A/c 1,200

FM M/s Accou nt


1.1.2010 To Bank A/c 40,000 1.1.2010 By Pick-up Van A/c 1,00,000

31.12.2010 To Bank A/c 23,600 1.1.2010 By H.P. InterestSuspense A/c

7,200

31.12.2010 To Balance c/d 43,600

1,07,200 1,07,200


31.12.2011 To Balance c/d 21,200

43,600 43,600



Liabilities `Assets `

FM & Co. Ltd. 43,600 Pick-up Van 1,00,000

Less: H.P. Interest Suspense (3,600) 40,000 Less: Depreciation (10,000) 90,000



19/52

11.19 Accounting


Liabilities `Assets `

FM & Co. Ltd. 21,200 Pick-up Van 90,000

Less: H.P. InterestSuspense (1,200) 20,000

Less: Depreciation (10,000) 80,000



Pick-up Van 80,000

Less: Depreciation (10,000) 70,000

Working Note:

Total Interest = `3,600 + `2,400 + `1,200 = `7,200.

Illustration 8

X Ltd. purchased 3 milk vans from Super Motors costing ` 75,000 each on hire purchasesystem. Payment was to be made: `45,000 down and the remainder in 3 equal instalments

together with interest @ 9%. X Ltd. writes off depreciation @ 20% on the diminishing balance.It paid the instalment at the end of the 1st year but could not pay the next. Super Motor agreed

to leave one milk van with the purchaser, adjusting the value of the other two milk vansagainst the amount due. The milk vans were valued on the basis of 30% depreciation annually

on written down value basis. X Ltd. settled the sellers dues after three months.Solution

In the Books of X Ltd.

Dr. (`) Cr. (`)

I Year

Milk Vans purchased:

Milk Vans A/c Dr. 2,25,000

To Vendor A/c 2,25,000

On down payment:

Vendor A/c Dr. 45,000

To Bank 45,000I Year end

InterestA/c(`1,80,000 @ 9%) Dr. 16,200

To Vendor A/c 16,200


To Bank A/c 76,200

Depreciation @ 20%



20/52



To Milk Vans A/c 45,000

II Year end

Depreciation @ 20%



Interest A/c Dr. 10,800

(1,20,000 @ 9%)

To Vendor A/c 10,800

Return of goods to vendor A/c Dr. 73,500


For Loss in Repossession:

Profit/Loss A/c Dr. 22,500


IIIrd Year Depreciation



Settlement of A/cs


To Bank 57,300

Milk Vans Accoun t

Year ` Year `

1 To Super Motors A/c 2,25,000 1 end By Depreciation A/c 45,000

By Balance c/d 1,80,000

2,25,000 2,25,000

2 To Balance b/d 1,80,000 2 end By Depreciation 36,000

Super Motors

(value of 2 vans after

depreciation for

2 years @ 30%) 73,500

By P & L A/c

(balancing figure) 22,500

By Balance c/d

(one van less depre-

ciation for 2 years) 48,000

1,80,000 1,80,000



21/52

11.21 Accounting

Super Motors Acc ount

Year ` Year `

1 To Bank 45,000 1 By Milk Vans A/c 2,25,000

To Bank 76,200 By Interest @ 9%

To Balance c/d 1,20,000 on ` 1,80,000 16,200

2,41,200 2,41,200

2 To Milk Van A/c 73,500 2 By Balance b/d 1,20,000

To Balance c/d 57,300 By Interest 10,800

1,30,800 1,30,800

3 To Bank 57,300 3 By Balance b/d 57,300

Illustration 9

A firm acquired two tractors under hire purchase agreements, details of which were as follows:

Tractor A Tractor B

Date of Purchase 1st April, 2011 1st Oct., 2011

` `

Cash price 14,000 19,000

Deposit 2,000 2,680

Interest (deemed to accrue evenly

over the period of agreement) 2,400 2,880

Both agreements provided for payment to be made in twenty-four monthly instalments,

commencing on the last day of the month following purchase, all instalments being paid on

due dates.

On 30th June, 2012, Tractor B was completely destroyed by fire. In full settlement, on

10th July, 2012 an insurance company paid ` 15,000 under a comprehensive policy out of

which ` 10,000 was paid to the hire purchase company in termination of the agreement. Any

balance on the hire purchase companys account in respect of these transactions was to be

written off.

The firm prepared accounts annually to 31st December and provided depreciation on tractors

on a straight-line basis at a rate of 20 per cent per annum rounded off to nearest ten rupees,

apportioned as from the date of purchase and up to the date of disposal.

You are required to record these transactions in the following accounts, carrying down the

balances on 31st December, 2011 and 31st December, 2012:

(a) Tractors on hire purchase.

(b) Provision for depreciation of tractors.



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(c) Disposal of tractors.

(d) Hire purchase company.

Solution

Hire Purchase accounts in the buyers books

(a) Tractors on Hire Purch ase Account

2011 ` 2011 `

April 1 To HP Co. - Cash price 14,000 Dec. 31 By Balance c/d

Tractor A 14,000

Oct. 1 HP Co. - Cash price Tractor B 19,000 33,000

Tractor B 19,000

33,000 33,000

2012 ` 2012 `

Jan. 1 To Balance b/d June30 By Disposal of

Tractor A 14,000 Tractor A/c - Transfer 19,000

Tractor B 19,000 33,000 Dec. 31 By Balance c/d 14,000

33,000 33,000

2013

Jan. 1 To Balance b/d 14,000

(b) Provision for Depreciation of Tractors Account 2011 ` 2011 `

Dec. 31 To Balance c/d 3,050 Dec. 31 By P & L A/c :

Tractor A 2,100

Tractor B 950 3,050

3,050 3,050

2012 ` 2012 `

June 30 To Disposal of Tractor Jan. 1 By Balance b/d 3,050accountTransfer 2,850 Jun. 30 By P & L A/c

Dec. 31 To Balance c/d 4,900 (Depn. for Tractor B) 1,900

Dec. 31 By P & L A/c(Depn. for Tractor A) 2,800

7,750 7,750

2013 `Jan. 1 By Balance b/d 4,900



23/52

11.23 Accounting

(c) Disposal of Tractor Accou nt

2012 ` 2012 `

June 30 To Tractors on hire June30 By Provision for

purchaseTractor B 19,000 Depn. of Tractors A/c 2,850

July 10 By Cash : Insurance 15,000

Dec. 31 By P & L A/c : Loss 1,150

19,000 19,000

Hire Purchase Co. Accou nt

2011 ` 2011 `

April 1 To Cash (deposit April 1 By Tractors onfor Tractor A) 2,000 Hire Purchase A/c

April To Cash6 instal- - Tractor A 14,000

Sept. ments @`600 3,600 Oct. 1 By Tractors on

Oct. 1 To Cashdeposit Hire Purchase A/c

for Tractor B 2,680 Tractor B 19,000

Oct. - To Cash3 instal- Dec. 31 By Interest A/c :

Dec. ments @`600 for For Tractor A

Tractor A 1,800 @`100 for

To Cash3 instal- 9 months `900

ments @ `800 2,400 For Tractor B

Dec. 31 To Balance c/d 21,780 @`120 for

3 months ` 360 1,260

34,260 34,260

2012 2012

Jan. To Cash6 instalments Jan. 1 By Balance b/d 21,780

@` 600 for Tractor A 3,600 Jun. 30 By Interest A/cfor

June To Cash6 instalments Tractor B @` 120

@` 800 for Tractor B 4,800 for 6 months 720

July 10 To Cash - final instalment Dec. 31 By Interest - for

for Tractor B 10,000 Tractor A @` 100

July- To Cash - 6 instalments @ for 12 months 1,200

` 600 for Tractor A 3,600

Dec. To Balance c/d 1,500

To P & L A/cunpaid

amount 200

23,700 23,700



24/52


Illustration 10

A machinery is sold on hire purchase. The terms of payment is four annual instalments of

`6,000 at the end of each year commencing from the date of agreement. Interest is charged

@ 20% and is included in the annual payment of ` 6,000.

Show Machinery Account and Hire Vendor Account in the books of the purchaser who

defaulted in the payment of the third yearly payment whereupon the vendor re-possessed themachinery. The purchaser provides depreciation on the machinery @ 10% per annum. All

workings should form part of your answers.

Solution

Machinery Account

` `

I Yr. To Hire Vendor A/c 15,533 I Yr. By Depreciation A/c 1,553

By Balance c/d 13,980

15,533 15,533

II Yr. To Balance b/d 13,980 II Yr. By Depreciation A/c* 1,398

By Balance c/d 12,582

13,980 13,980

III Yr. To Balance b/d 12,582 III Yr. By Depreciation A/c* 1,258

By Hire Vendor 11,000

By Profit & Loss A/c 324

(Loss on Surrender)12,582 12,582

*It has been assumed that depreciation has been written off on written down value method.

Alternatively straight line method may be assumed.

Depreciation has been directly credited to the Machinery Account; it could have been

accumulated in provision for depreciation account.

Hire Vendor Account

` `

I Yr. To Bank A/c 6,000 I Yr. By Machinery A/c 15,533

To Balance c/d 12,639 By Interest A/c 3,106

18,639 18,639

II Yr. To Bank A/c 6,000 II Yr. By Balance b/d 12,639

To Balance c/d 9,167 By Interest A/c 2,528

15,167 15,167

III Yr. To Machinery A/c 11,000 III Yr. By Balance b/d 9,167

(transfer) By Interest A/c 1,833

11,000 11,000



25/52

11.25 Accounting

Note : Alternatively, total interest could have been debited to Interest Suspense A/c andcredited to Hire Vendor A/c with consequential changes.

Working Notes:

Instalment Amount Interest Principal

4th Instalment 6,000 ` `

Interest 6,000 x20

120 1,000 1,000 5,000

5,000

Add : 3rd Instalment 6,00011,000

Interest 11,000 x 20120

1,833 1,833 4,167

9,167

Add :2nd Instalment 6,00015,167

Interest 15,167 x20

120 2,528 2,528 3,472

12,639Add :Ist Instalment 6,000

18,639

Interest 18,639 x20

120 3,106 3,106 2,894

15,533 8,467 15,533

Illustration 11

X Transport Ltd. purchased from Delhi Motors 3 Tempos costing `50,000 each on the hirepurchase system on 1-1-2010. Payment was to be made `30,000 down and the remainder in

3 equal annual instalments payable on 31-12-2010, 31-12-2011 and 31-12-2012 together withinterest @ 9%. X Transport Ltd. write off depreciation at the rate of 20% on the diminishingbalance. It paid the instalment due at the end of the first year i.e. 31-12-2010 but could not

pay the next on 31-12-2011. Delhi Motors agreed to leave one Tempo with the purchaser on

1-1-2012 adjusting the value of the other 2 Tempos against the amount due on 31-12-2011.The Tempos were valued on the basis of 30% depreciation annually. Show the necessary

accounts in the books of X Transport Ltd. for the years 2010, 2011 and 2012 .

SolutionX Transport L td.

Tempo Account

2010 ` 2010 `

Jan. 1 To Delhi Motors 1,50,000 Dec. 31 By Depreciation A/c :

20% on 1,50,000 30,000



26/52


By Balance c/d 1,20,0001,50,000 1,50,000

2011 2011

Jan. 1 To Balance b/d 1,20,000 Dec. 31 By Depreciation A/c 24,000

By Delhi Motors A/c

(Value of 2 tempos

taken away) 49,000

By Profit and Loss A/c

(balancing figure) 15,000

By Balance c/d (Value

of one tempo left) 32,000

1,20,000 1,20,000

2012 2012

Jan. 1 To Balance b/d 32,000 Dec. 31 By Depreciation A/c 6,400

By Balance b/d 25,600

32,000 32,000

Delhi Motors Account

2010 ` 2010 `

Jan. 1 To Bank (Down Payment) 30,000 Jan. 1 By Tempos A/c 1,50,000

Dec. 31 To Bank 50,800 Dec. 31 By Interest (9% on

To Balance c/d 80,000 ` 1,20,000) 10,800

1,60,800 1,60,800

2011 2011

Jan. 1 To Tempo 49,000 Jan. 1 By Balance b/d 80,000

Dec. 31 To Balance c/d 38,200 Dec. 31 By Interest (9%

on ` 80,000) 7,200

87,200 87,200

2012 ` 2012 `

Dec. 31 To Bank 41,638 Jan. 1 By Balance b/d 38,200

Dec. 31 By Interest (9% on

` 38,200) 3,438

41,638 41,638

Alternative Method

Tempo Acc ount

2010 ` 2010 `

Jan. 1 To Bank A/c (down Dec. 31 By Depreciation

payment) 30,000 @ 20% on



27/52

11.27 Accounting

Dec. 31 To Delhi Motors A/c ` 1,50,000 30,000

(Ist instalment) 40,000 By Balance c/d 40,000

70,000 70,000

2011 ` 2011 `

Jan. 1 To Balance b/d 40,000 Dec. 31 By Depreciation A/c 24,000

Dec. 31 To Delhi Motors A/c By Profit & Loss A/c

- creating a liability for (balancing figure) 22,200

` 38,200, amount due By Balance c/d

(see 1st method) 38,200 (Value of tempo left) 32,000

78,200 78,200

2012 ` 2012 `Jan. 1 To Balance b/d 32,000 Dec. 31 By Depreciation A/c 6,400

By Balance b/d 25,600

32,000 32,000

Delhi Motors

2010 ` 2010 `

Dec. 31 To Bank A/c 50,800 Dec. 31 By Tempo A/c 40,000

By Interest A/c 10,800

50,800 50,800

2011 2011

Dec. 31 To Balance c/d 38,200 Dec. 31 By Tempos A/c 38,2002012 2012

Dec. 31 To Bank A/c 41,638 Jan. 1 By Balance b/d 38,200

Dec. 31 By Interest (9%

on ` 38,200) 3,438

41,638 41,638

Working Notes :

(1) Value of a Tempo left with the buyer:

`

Cost 50,000

Depreciation @ 20% p.a. under WDV method for

2 years [i.e. `10,000 + `8,000] (18,000)

Value of the Tempo left with the buyer at the end of 2nd year 32,000

(2) Value of Tempos taken away by the seller:

No. of tempos Two



28/52

Cost `

Depreci

Under

Value o

8.2 In the

There are divendor. It is

the length of

8.2.1 Sales

A business t

method, hireagrees to a

special Sale

The amounton the asset

1. When

Hire P

T

2. When t

Bank

T

3. When

Hire P

T

4. When t

S

50,000 2

ation @ 30

DV method

f tempos tak

ooks of th

fferent methselected ac

the period o

Method

at sells relat

purchase scept paymDay Book i

due from theside as Hir

oods are sol

rchaser Acc

H.P. Sales

he down pay

ccount

Hire Purch

n instalment

rchaser Acc

Interest Ac

he amount o

M

ales Method

Hir

for 2 years [i

n away at th

e Hire Ven

ds of recorording to th

purchase, e

ively large it

le is treatednts in instals maintained

hire purchaPurchase D

ld and delive

ount

Account

ment is recei

ser Account

becomes du

ount

ount

f instalment i

thods of reco

Purchase a

.e. ` 30,000

e end of 2nd

or

ing hire purtype and v

c. The differ

ms on hire

as a creditments and ffor recordin

er at the enebtors.

Journal Ent

ed under hir

ved

e

received

rding hire pur

I

nd Instalme

+` 21,000

year

hase transalue of good

nt methods

urchase ma

ale. The onlor that heall sales u

of the year

ries

purchase

chase transa

terest Suspe

nt Sale Tran

]

tions in thesold, volum

re

adopt this

y exception iharges interder hire pur

is shown in t

Dr. [Full

Dr.

Dr.

tions

se Method

sactions 1

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ethod. Unde

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he Balance

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1.28

`

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ndorly, a

ent.

heet



29/52

11.29 Accounting

Bank Account Dr.

To Hire Purchaser Account

5. For closing interest Account

Interest Account Dr.

To Profit and Loss Account

6. For closing Hire Purchase Sales Account

H.P. Sales Account Dr.

To Trading Account

It is worth noting that

(i) The entire profit on sale under hire purchase agreement is credited to the Profit

and Loss account of the year in which the sale has taken place; and

(ii) Interest pertaining to each accounting period is credited to the Profit and Loss

Account of that year.

8.2.2 Interest Suspense Method

This method is almost similar to the sales method, except the accounting for interest. Under thismethod, the hire purchaser is debited with full cash price and interest (total) included in the hire

selling price. Credit is given to the H.P. Sales Account and Interest Suspense Account. When the

instalment is received, the Bank Account is debited and the Hire Purchaser Account is credited. Atthe same time an appropriate amount of interest (i.e., interest for the relevant accounting period) is

removed from the Interest Suspense Account and credited to the Interest Account. At the time ofpreparation of Final Accounts, interest is transferred to the credit of the Profit and Loss Account.The balance of the Interest Suspense Account is shown in the Balance Sheet as a deduction from

Hire Purchase Debtors.

Journal Entries

1. When goods are sold and delivered under hire purchase

Hire Purchase Account Dr. [Full cash price + total interest]

To H.P. Sales Account [Full cash price]

To Interest Suspense Account [Total Interest]2. When down payment/instalment is received

Bank Account Dr.

To Hire Purchaser Account

3. For interest of the relevant accounting period

Interest Suspense Account Dr.

To Interest Account



30/52


4. For closing interest Account

Interest Account Dr.

To Profit and Loss Account

5. For closing Hire Purchase Sales Account

H.P. Sales Account Dr.

To Trading Account

The disclosure in balance sheet of the respective parties will be:

Balance Sheet of Hire Purchaser Balance Sheet of Vendor

Assets Assets

Fixed assets : Current assets :

Asset on Hire purchase Hire purchase debtors

Add :Balance in Interest suspense A/c Less :Balance in Interest suspense A/c

Less :Depreciation

Illustration 12

M/s Delhi Electronics sells colour TVs., on hire purchase basis. Cost per set is `14,000, Cashsale price ` 15,500 and hire purchase sale price is ` 16,800 for 12 monthly instalmentspayable by 10th of every month. However, the buyer has to make cash down`1,800 at the time of purchase.

Hire Purchase transactions (No. of sets) in 2012 - Jan. 10, Feb. 12, March 10, April 12, May10, June 10, July 10, August 15, Sept. 11, Oct. 20, Nov. 20, Dec. 10.

Let us suppose all instalments are duly collected. Show necessary Journal Entries.

Solution

Various relevant accounting information in relation to hire purchase transactions are computedas follows :

Total No. of Transactions : 150

Cash down : `1,800 150 = `2,70,000

Installments Collected/Due

Transactions No. of Installments collected No. of Installments Due

Jan. 10 11 = 110 10 1 = 10

Feb. 12 10 = 120 12 2 = 24

March 10 9 = 90 10 3 = 30

April 12 8 = 96 12 4 = 48

May 10 7 = 70 10 5 = 50

June 10 6 = 60 10 6 = 60



31/52

11.31 Accounting

July 10 5 = 50 10 7 = 70Aug. 15 4 = 60 15 8 = 120

Sept. 11 3 = 33 11 9 = 99

Oct. 20 2 = 40 20 10 = 200

Nov. 20 1 = 20 20 11 = 220

Dec. 10 0 = 10 12 = 120

150 749 150 1051

Check:

Total Instalments for 150 hire purchase transactions are 1800 (15012) of which 749

instalments fell due and collected and the balance 1051 instalments are not yet paid.

Amount collected for 749 instalments

` `16,800 1,800749

12

= ` 9,36,250

Amount not yet due

` `16,800 1,8001,051

12 = `13,13,750

Cash Down = `2,70,000

Total (`16,800 150) = `25,20,000

Hire Vendor should recognise the amount of instalments collected and cash down value (i.e.`2,70,000 + `9,36,250) `12,06,250 as sale. Balance `13,13,750 is value of goods lyingwith the customer at hire purchase price. Stock Reserve should be computed and deducted

from such amount to show the Hire Purchase Stock at cost.

Goods lying with Hire Purchaser at Hire Purchase Price icePrurchasePHire

Cost

Stock at cost =`

``

14,00013,13,750

16,800

= `10,94,792

Stock Reserve = (`

13,13,75010,94,792) =`2

,18,958Journal Entries

` `

(1) For Cash down at the Cash/Bank A/c Dr. 2,70,000

time of hire transaction To Hire Purchase Sale A/c 2,70,000

(2) When instalments Instalment Due A/c Dr. 9,36,250

fall due To Hire Purchase Sales 9,36,250



32/52


(3) On collection of Cash/Bank A/c Dr. 9,36,250

instalments To Instalment Due A/c 9,36,250

(4) For instalment not Hire Purchase Stock A/c Dr. 13,13,750

due at the year To Trading A/c 13,13,750

(5) For Stock Reserve Stock Reserve A/c Dr. 2,18,958

To Hire Purchase Stock A/c 2,18,958

If some instalments become due but not collected at the year end, then they would appear in

the Balance Sheet as an asset just like Sundry Debtors.

9. Hire Purchase Transactions for Goods of Small ValueTill now we were dealing with the hire purchase transactions of significant sales value. Now,

let us discuss the hire purchase transactions between a retailer and the consumers .Since in retail business, the volume of transactions is large and every day the retailer enters

into number of hire purchase contracts, therefore, accounting of such hire purchase

transactions of small values is important from t he sellers view point and not the buyer.

Since large number of transactions take place it is neither feasable to maintain separateaccount for each transaction nor the retailer is interested in knowing the profit in each hire

purchase transaction rather he is interested in knowing the overall profit or loss arising fromall the transactions in a particular accounitng period. The profit and hire purchase interest are

combined into one figure and it is apportioned over the hire purchase period.

10. Terms used in regard to Hire Purchase Sales of Small Items

(a) Cost price of goods sold on hire purch ase: The hire vendor buys goods either fromthe manufacturers directly or from the wholesalers. He sells them either against cash or under

the hire purchase system. When he sells goods against cash, he does so at a profit at a price

more than the cost price. But when he sells the goods under hire purchase, he sells them at aprice which is higher than the price of cash purchase. The extra charge is just to cover theloss of interest on these transactions. However, the interest in these transactions is not

calculated separately, applying the concept of materiality. Profit, in this case, is calculated onthe basis of the difference between cost price and hire purchase price. This difference is

generally known II 'loading'. Loading can be expressed as a percentage of cost (known as'mark-up') or as a percentage of sales value or hire purchase price (known as 'margin'). Forexample, if the cost price of an item is `1,000 and to hire purchase price is `1,250, the profitis `250. If the profit is expressed as a percentage of cost, mark up becomes 25%. Likewise, if

it is expressed as a percentage of the hire purchase price, the margin becomes 20%.

(b) Value of goods sold on hire purch ase: It is the total of the hire purchase price of allgoods sold during the accounting period under the hire purchase system. Generally, the value

of goods sold on hire purchase given in the examination problem. If, however, it is not given, it



33/52

11.33 Accounting

can be worked out as follows:

(i) Applying loading rate to the cost of goods sold under hire purchase system.

(ii) [Down payment + (Number of installments X amount of each installment] x Number of

items sold.

(c) Cash received:It represents the total amount received during the accounting period inrespect to hire purchase sales. It includes down payment, installments received in respect to

previous year(s) as well as of the current year.

(d) Hire purch ase debtors: Commonly, a debtor is a person to whom goods are sold oncredit. There some difference between an ordinary debtor and a hire purchase debtor. A hire

purchase customer is require to pay different installments on different due dates. In the caseof hire purchase debtors it is the total amount of such installments which have fallen dueduring a particular accounting period but has not yet been paid to the hire purchase

customers. (see example of next item)

Hire purchase debtors is also known as (i) Installments due but not yet paid; or (ii)Installment due, customer paying, etc.

(e) Hire purch ase stock : It is also known as installments not yet due or goods with hire

purchase customers. Under a hire purchase agreement, some installments faIl due during thecurrent accounting period, while others faIl due on the subsequent accounting year(s). The

total amount of installments which have not yet become due during the current accountingperiod is called stock on hire purchase. It should be not that it does not represent any physical

stock. For example, if the cash price of an item is `1,000 and the hire purchase price is` 1,200. The payment is to be made in twenty four monthly equal installments, i.e., ` 50 p.m.

Out of 24 installments, 10 installments are due for payment during the current accountingperiod 2011-12 and balance 14 installments are due for payment in the subsequent years. In

this case, the hire purchase stock will be ` 50 (24-10) = ` 700.

In this example, let us assume that out of the 10 instalments due during 2011-12, the hire

purchase custom paid only 6 installments during the year. Therefore, the hire purchase

debtors for 2011-12 will be ` 50 (10 - 6) = ` 200.

(f) Stock at shop: It is the physical stock of unsold goods lying in the godown of theretailer. The cost of unsold stock in the shop has nothing to do with the ascertainment of profit

or loss arising out of the hire purchase transactions. However, this figure is relevant towardsthe ascertainment of cost of goods sold on hire purchase which can be ascertained by

deducting the stock in the shop from the total purchases. When the cost of goods sold isgiven, it becomes very simple to ascertain the value of goods sold on hire purchase by simplyadd the percentage of mark-up.



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11. Acc Valu

There are t

on hire purc

11.1 Debto

In this methPurchase T

separately.

(a) Debit t

(i) Opr

co

(ii) O

fr

(iii) V

(iv) E

(v) L

(b) Credit

(i) Cinth

va

reR

abti

unting oe

o common

ase system.

rs Method

d the Hire Pading Acco

e Hire Purc

ening balanvious year.

nvert that int

ening balan

m the previo

lue of good

penses incu

ss on repos

he ire Pur

sh receivedludes downcurrent ye

lue of HP ite

ognized in tvenue Reco

ility to assese of sale. I

Debt

HirTr

Hir

f Hire Pu

ethod for as

rchase Tradint is to m

hase Tradin

e of H.P. StGenerally, it

Hire Purch

e of H.P. D

us year.

sold on Hire

rred during t

ession of go

hase Tradi

from hireayment, hirr collected d

m is not cre

he year of sgnition, also

the ultimatcase there i

Methods f

rs Method

e Purchaseding Account

Purchase a

chase Tr

certaining pr

ng account iasure the

Account b

ock (Instalm is shown at

se price by

btors(Instal

Purchase d

e accountin

ods.

g Account

urchase cupurchase inuring the ac

ited to HP

le as per ththe profit(re

collection wis uncertaint

or ascertainin

SM

nd Instalme

ansaction

ofit or loss o

prepared.rofitability o

nts not yethire purcha

dding loadin

ment due but

ring the acc

period.

y

tomers duristalments ofounting peri

rading Acco

e matchingenue) shoul

ith reasonablin ultimate

profit or loss

ock and Debtethod

1) Hire PurchStock Accou2) Hire PurchAdjustment

nt Sale Tran

s for Go

sale of go

he objectivef the Hire

ue)broughte price. If it

g.

not yet paid

unting perio

ng the accthe previousod. Since ful

nt, entire pr

oncept. Furbe recogni

e certainty isollection of t

rs

aset,aseccount

sactions 1

ds of S

ds of small

of preparingurchase div

forward fro is given at

)brought for

.

unting perioyear as welll amount of

ofit on sale i

her as pered only whe

not lackinghe sales, rev

1.34

all

alue

Hireision

thecost,

ard

d. Itas ofales

not

S 9,the

t theenue



35/52

11.35 Accounting

recognition is postponed to the extent of uncertainty involved. In such cases, it maybe appropriate to recognise revenue only when it is reasonably certain that theultimate collection will be made. When recognition of revenue is postponed due to

the effect of uncertainties, it is considered as revenue of the period in which it is

properly recognised.

(ii) Instalments due but not paid on goods repossessed.

(iii) Closing balance of H.P. Stock (Instalment not yet due) at hire purchase pricecarried forward to the next period. If it is not given in the problem, it can be

calculated by preparing Memorandum Goods with H.P. Customers Account.

(iv) The closing balance of H.P. Debtors (Instalments due but not yet paid) is carried

forward to next period. If the closing balance of H.P. Debtors is not given in theproblem, it can be calculated by preparing Memorandum H.P. Debtors Account.

Pass adjustment entries for the following:

(i) For loading on opening balance of Hire Purchase Stock(Instalments not yet due/Goods with H.P. Customers)

Stock Reserve Account Dr.

To Hire Purchase Trading Account

(ii) For loading on goods sold on Hire Purchase during the year

Goods sold on Hire Purchase Account Dr.

To Hire Purchase Trading(iii) For loading on closing balance of Hire Purchase Stock

(Instalments not yet due/Goods with H.P. Customers)

Hire Purchase Trading Account Dr.

To Stock Reserve Account

The proforma of a Hire Purchase Trading Account is given below:

Dr. Hire Purchase Trading Accou nt Cr.


To Balance b/d: By Cash A/c

Hire Purchase Stock

(at H.P. price)

By Goods Repossessed

A/c (Instalments duebut not paid)

Hire PurchaseDebtors

By Stock Reserve A/c

To Goods Sold on H.P.

A/c (H.P. price)

(Loading on opening

H.P. stock)



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To Loss on GoodsRepossessed A/c

By Goods sold on H.P.A/c

To Expenses A/c (Loading on goodssold)

To Stock Reserve A/c By Balance c/d:

(Loading on closingH.P. stock)

H.P. Stock (at H.P.price)

To Profit & Loss A/c H.P. Debtors

Let us see how to prepare Hire Purchase Trading Account.

(1) Credit all down payments and instalments falling due to hire purchase sales account.

Transfer balance in Hire Purchase Sales Account to Hire Purchase Trading Account.

(2) Transfer cost of all transactions to Hire Purchase Trading Account.

Hire Purchase Trading A/c Dr.

To Shop Stock A/c

(3) Charge any special expenses to Hire Purchase Trading Account.

(4) Treat instalments not yet due as stock lying with customers and transfer to Hire Purchase

Trading Account.

(5) Charge appropriate stock reserve.

Illustration 13

With the information given in Illustration 12, prepare Hire Purchase Trading A/c.

Solution

Hire Purchase Trading A/c

` `

To Shop Stock 21,00,000 By Hire Purchase

(14,000 150) Sales A/c 12,06,250

To Stock Reserve 2,18,958 By Stock (with

To Profittransferred customers)at hire

to P & L A/c 2,01,042 purchase price 13,13,750

25,20,000 25,20,000

Illustration 14

M/s Wye & Co. sell goods on hire purchase, adding 50% to cost. From the following figuresprepare the Hire Purchase Trading Account:

`

Goods with customers in Jan. 2012, instalments not yet due 5,400

Goods sold on hire purchase during 2012 25,500



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11.37 Accounting

Cash received from customers during 2012 20,100

Instalments due but not yet received at the end of the year, customers paying 1,800

All figures are on the basis of hire purchase price.

Solution

Hire-purchase Trading Account for the year ending 31st Dec., 2012

Dr. Cr.

` `

To Stock with Customers on By Cash 20,100

1-1-2012 - hire purchase By Instalments due 1,800

price 5,400 By Goods sold on Hire

To Goods sold on Hire- Purchase A/c - loading 8,500

purchase A/c 25,500 By Stock Reserve (Opening) 1,800

To Stock Reserve required 3000 By Stock with customers 9,000*

To Profit & Loss A/c 7,300

41,200 41,200

*Stock with Customers on 31-12-2012 `

Instalment not due on 1-1-2012 5,400

Goods sold on H.P. 25,500

30,900

Less: Cash received 20,100

Instalments due 1,800 (21,900)

9,000

Illustration 15

Krishna Agencies started business on 1st

April, 2012. During the year ended 31st

March, 2013,they sold under-mentioned durables under two schemes Cash Price Scheme (CPS) andHire-Purchase Scheme (HPS).

Under the CPS they priced the goods at cost plus 25% and collected it on delivery.

Under the HPS the buyers were required to sign a Hire-purchase Agreement undertaking topay for the value of the goods including finance charges in 30 instalments, the value being

calculated at Cash Price plus 50%.



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The following are the details available at the end of 31 st March, 2013 with regard to theproducts :

ProductNos.

purchased

Nos.sold

underCPS

Nos.sold

underHPS

Costper unit

`

No. ofinstalments

due during theyear

No. ofinstalments

received duringthe year

TV sets 90 20 60 16,000 1,080 1,000

WashingMachines

70 20 40 12,000 840 800

The following were the expenses during the year:

`

Rent 1,20,000

Salaries 1,44,000

Commission to Salesmen 12,000

Office Expenses 1,20,000

From the above information, you are required to prepare :

(a) Hire-purchase Trading Account, and

(b) Trading and Profit & Loss Account.

SolutionIn the books of Krishna Agencies

Hire-Purchase Trading Account

for t he year ended 31st March, 2013

` ` ` `

To Goods sold on H.P.A/c:

TVs (60 30,000) 18,00,000

By Bank A/c cashreceivedTVs (1,000` 1,000) 10,00,000

Washing Machines(40 ` 22,500) 9,00,000 27,00,000

Washing Machines(800 ` 750) 6,00,000 16,00,000

To H.P. Stock Reserve

` 9,90,000

5.187

5.87

4,62,000By Instalment Due A/c:

TVs

(80`

1,000) 80,000To Profit & Loss A/c(H.P.profit transferred)

7,98,000 Washing Machines(40 750)

30,000 1,10,000

By Goods sold on HPA/c: (Cancellation ofloading)

`27,00,000 5.187

5.87

By H.P. Stock (W.N 2)

12,60,0009,90,000

39,60,000 39,60,000



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11.39 Accounting

Trading and Profit & Loss Acc ountfor t he year ended 31st March, 2013

` ` ` `

To Purchases:

TVs (90 16,000) 14,40,000

By Sales:

TVs (20 20,000) 4,00,000

Washing Machines

(70 ` 12,000) 8,40,000 22,80,000

Washing Machines

(20 15,000) 3,00,000 7,00,000

To Gross profit c/d 1,40,000 By Goods sold on H.P.

A/c

(27,00,000

12,60,000)

By Shop Stock (W. N 3)

14,40,000

2,80,000

24,20,000 24,20,000

To Salaries 1,44,000 By Gross profit b/d 1,40,000

To Rent

To Commission

1,20,000

12,000

By H.P. Trading A/c

(H.P. Profit) 7,98,000

To Office expenses 1,20,000

To Net Profit 5,42,000

9,38,000 9,38,000

Working Notes:(1) Calculation of per unit cash price, H.P. price and Instalment Amount:

Product Cost

`

Cash Price

` (Cost 1.25)

H.P. price

` (Cash

Price1.50)

Instalment

Amount (`)

(H.P. price/No.

of instalments)

TV sets 16,000 20,000 30,000 1,000

Washing Machines 12,000 15,000 22,500 750

(2) Calculation of H.P. Stock as on 31stMarch, 2013:

Product Total No. ofInstalments

(Nos.)

InstalmentsDue in 2012-

2013

(Nos.)

Instalmentsnot due in 2012-

2013

(Nos.)

Amount`

TV sets 1800 1080 720 7,20,000

Washing Machines 1,200 840 360 2,70,000

9,90,000



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(3) Calculation of Shop Stock as on 31stMarch, 2013:

Product Purchased(Nos.) Sold (Nos.) Balance (Nos.) Amount `

TV sets 90 80 10 1,60,000

Washing Machines 70 60 10 1,20,000

2,80,000

Illustration 16

From the following information extracted from the books of Mohan Pvt. Ltd. prepare Hire

Purchase Trading account for the year ended 31.3.2012, showing the profit in respect of the

hire-purchase business of the company:

(i) Instalments due but not received on 1.4.2011 ` 30,000.(ii) Instalments due but not received on 31.3.2012 ` 50,000.

(iii) Cash received during the year ended 31st March 2012 by way of a hire-purchaseinstalments - ` 40,00,000.

(iv) Value of Stock out on hire-purchase as at 1.4.2011 at hire-purchase price (loading 20%above cost) - ` 1,20,000.

(v) Cost price of truck out in hire-purchase as on 31.3.2012, amounted ` 20,00,000, inrespect of which instalments receivable were ` 24,00,000 and instalments received anddue up to 31.3.2012 amounted ` 18,00,000 in total.

(vi) Purchase of trucks during the financial year 2011-12 - ` 40,00,000.

(vii) Sale of trucks, otherwise than on H.P. (at a profit of 6.25% of cost thereof) -` 4,25,000.

(viii) Body building charges in respect of truck, sold on H.P. - ` 2,00,000.

(ix) Interest paid was ` 40,000 and unsold trucks on 31.3.2012 at cost price were` 80,000 (Hire-purchase price ` 96,000).

Solution:

In the books of Mohan Pvt. Ltd.

Hire Purchase Trading Accou nt

Dr. Cr.

` `

To Opening Balance: By Bank 40,00,000H.P. Stock 1,20,000 By Stock reserve 20,000

ToH.P. DebtorsTrucks sent on H.P.

30,000 1,50,000 By Trucks sent on H.P. 7,04,000

Purchased during the By Closing balance

year 40,00,000 H.P. Stock 6,00,000

Less: Other sales 4,00,000 H.P. Debtors 50,000

36,00,000



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11.41 Accounting

Less: Closing Stock 80,00035,20,000

Add: Loading 7,04,000 42,24,000

To Body Building Charges 2,00,000

To Bank (Interest paid) 40,000

To Stock reserve (20% on cost) 1,00,000

To Profit and Loss A/c 6,60,000

53,74,000 53,74,000

Working Notes:

Value of closing H.P. Stock:

(1) Cost of trucks in respect of Hire Purchase agreement subsisting as on31.3.2012

20,00,000

(2) H.P. price in respect thereof 24,00,000

(3) Instalments not due (24 lakhs less 18 lakhs) 6,00,000

11.2 Stock and Debtors Method

In this method, Hire Purchase Stock Account, Hire Purchase Adjustment Account is

maintained. Following are the entries to be made.

(i) When goods are sold on hire purchase

Hire purchase stock A/c Dr. Full H.P. Price

To Stock A/c Actual cost price

To Hire Purchase Adjustment A/c Difference between

cost and H.P. price

(ii) When instalments become due for payment

Hire purchase Debtors A/c Dr.

To Hire purchase Stock A/c

(iii) When cash is received

Cash A/c Dr.

To Hire Purchase Debtors A/c

(iv) Stock Reserve on opening Stoc k

Stock Reserve A/c Dr.

To Hire Purchase Adjustment A/c

(v) Stock Reserve on closing Stock

Hire Purchase Adjustment A/c Dr.

To Stock Reserve A/c

Hire purchase Debtors Account will consist of opening balance instalment due on goods sold

on hire purchase on the debit side while cash received and closing balance on the credit side.



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Hire purchase stock account will consist of opening balance and goods sold on hire purchaseduring the year in the debit side, while instalments due from debtors and closing balance onthe credit side. The stock values are recorded at hire purchase price (i.e. cost + profit on H.P.

Sales).

Hire purchase adjustment account will consist of stock reserve on opening stock and closing

stock in the credit side and debit side respectively. Further the loading element in goods soldon hire purchase (profit) will be credited in this account. This account shows the actual profit

earned by means of hire purchase system.

Illustration 17

Y M/s sells products on hire purchase terms, the price being cost plus 33-1/3%. From the

following particulars for 2012, prepare Hire Purchase Stock Account, Shop Stock Account,Hire Purchase Debtors Account, Stock Reserve Account and Hire Purchase AdjustmentAccount (for profit) :

2012 `

Jan. 1 Stock out on hire at Hire Purchase Price 1,20,000

Stock in hand, at Shop 15,000

Instalment due (Customers still paying) 9,000

Dec. 31 Stock out on hire at Hire Purchase Price 1,38,000

Stock in hand, at Shop 21,000

Instalments due (Customers still paying) 15,000

Cash received during the year 2,40,000Solution

Hire Purchase Debtor Accou nt

2012 ` 2012 `

Jan. 1 To Balance b/d 9,000 Jan. 1 By Bank A/c 2,40,000

To Hire Purchase Stock A/c By Balance c/d 15,000

(instalments due during

the year) (Balancing fig.) 2,46,000

2,55,000 2,55,000

Hire Purchase Stock Account

2012 ` 2012 `

Jan. 1 To Balance b/d 1,20,000 Jan. - To Goods sold on Hire Dec. By H.P. Debtors A/c 2,46,000

Purchase (75%) 1,98,000 Dec. 31 By Balance c/d 1,38,000 To H.P., Adj. A/c (25%) 66,000

3,84,000 3,84,000



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11.43 Accounting

Shop Stock Account

2012 ` 2012 `

Jan. 1 To Balance b/d 15,000 By H.P. Stock A/cTo Purchases A/c (Cost of Goods sold) 1,98,000

(Balancing fig.) 2,04,000 By Balance c/d 21,000

2,19,000 2,19,000

Stock Reserve Account

2012 ` 2012 `

To Hire Purchase Adjustment By Balance b/d

(transfer) 30,000 (25% on 1,20,000) 30,000

To Balance c/d 34,500 By Hire Purchase

Adjustment A/c 34,500

64,500 64,500

Hire Purchase Adjustment Account

2012 ` 2012 `

To Stock Reserve-Closing 34,500 By Stock Reserve-Opening 30,000

To Profit & Loss Account 61,500 By H.P. Stock 66,000

96,000 96,000

12. Calculation of Missing Figures

Sometimes in the examination, some figures required to calculate profit/loss are not given.These may be: (i) Hire Purchase Stock; (ii) Hire Purchase Debtors; (iii) Purchases; or (iv)Cash received, etc., Before preparing the Hire Purchase Trading Account, the missing item(s)

should be calculated first. The following steps are followed:

Step 1: Draw up the following Memorandum Accounts.

(a) Memorandum Stock at Shop Account.

(b) Memorandum H.P. Stock Account/Stock with H.P. Customers Account.

(c) Memorandum H.P. Debtors Account/Instalments Due Account

Step 2: Place the available figures in the respective accounts.

Step 3: Balance the account having maximum figures available. It will be helpful in findingout the missing figure of that account.

Step 4: Place the figures so calculated in Step 3 to the relevant account.

Step 5: Continue the process of transfer until all the figures are available.

The proforma of these accounts are given below:



44/52


Dr. Memorandum Stock at Shop Account Cr.Particulars ` Particulars `

To Balance b/d (at cost) By Goods sold on HirePurchase A/c (at cost)

To Purchases By Balance c/d

Dr. Memorandu m Hire Purchase Stock Cr.

Particulars ` Particulars `

To Balance b/d (at H.P. Price) By Cash A/c

To H.P. Stock A/c (totalinstalments due)

By Goods Repossessed A/c(instalments not yet due)

By Balance c/d

Dr. Memorandum Hire Purchases Debtors Accou nt Cr.

Particulars ` Particulars `

To Balance b/d (at H.P. price) By Cash A/c

To H.P. Stock A/c (totalinstalments due)

By Goods Repossessed A/c(install, due but not yetrecd.)

By Balance c/d

13. Repossession

In a hire purchase agreement the hire purchaser has to pay up to the last instalment to obtainthe ownership of goods. If the hire purchaser fails to pay any of the instalments, the hirevendor takes the asset back in its actual form without any refund of the earlier payments to the

hire purchaser. The amounts received from the hire purchaser through down payment and

instalments are treated as the hire charges by the hire vendor. This act of recovery ofpossession of the asset is termed as repossession.

Repossessed assets are resold to any other customer after repairing or reconditioning (if necessary).

Accounting figures relating to repossessed assets are segregated from the normal hire purchase

entries. Repossessions are then accounted for in a separate Goods Repossessed Account.

The following are the Journal Entries for repossession

(1) When the goods are repossessed

Goods Repossessed Account Dr. [Instalments due but not yet paid]

To Hire Purchase Trading Account

(2) When there is a loss on repossession

[Selling price/market price is less than

Instalments due but not yet paid]



45/52

11.45 Acc

Hire P

To

(3) When

[SellingInstal

Profit o

To

So far as thof the asset

called Com

13.1 CompThe hire ve

Account to

The hire puVendor Acc

on reposses

Particula

Purchase/S

Installment

Interest

Repossessi

ounting

rchase Tradi

oss on Rep

here is a pr

price/markeents due but

n Repossess

ire Purchas

repossessior a part the

lete Reposs

lete Reposdor closes

oods Repos

chaser closunt to Hire

ion in Asset

s

les Asse THire

TInter T

n HireT

Complete

ng Account

ssession Ac

fit on repo

price is grenot yet paid

ion Account

Trading Ac

n of assetseof dependi

ssion and t

sessionire Purchas

essed Acco

s the Hireurchase As

Account.

Books of hir

A/cHire Vendoendor A/c

Cash A/cst A/cHire Vendoendor A/c

o Asset A/c

epossession

ount

session

ter than]

ount

re concerneg on the ag

e latter Par

rs Account

nt.

Vendors Acet/Trading

purchaser

Dr.A/c

Dr.

Dr.

Dr.

Repossessi

Dr.

Dr.

d, the hire veement bet

tial Reposse

by transferri

count by traccount and t

Hire P ToCash

ToHire P ToGoods To

n

artial Reposs

ndor can taeen the parti

sion.

ng balance

nsferring thhen finding t

Books of hi

urchaser A/cales A/c/c

Hire Purchasurchaser A/cInterest A/cRepossess

Hire Purchas

ession

e back theies. The for

f Hire Purc

balance ofhe profit and

re vendor

Dr.

Dr.

er A/cDr.

d A/c Dr.er

holeer is

aser

Hireloss



46/52


13.2 Partial Repossess ion

In case of a partial repossession, only a part of the asset is taken back by the hire vendor andother part is left with the hire purchaser. The Journal Entries are as usual up to the date of default(excepting entry for payment) in the books of both the parties. As a portion of the asset is still left

with the hire purchaser, neither party closes the account of the other in their respective books.

Assets are repossessed at a mutually agreed value (based on agreed rate of depreciation which is

an enhanced rate). The hire vendor debits the Goods Repossessed Account and credit the HirePurchaser Account with the value as agreed upon on the repossession. Similarly, the hire

purchaser debits the Hire Vendor Account and credits the Assets Account with the same amount. Ifthe repossessed value is less than the book value of the asset, the difference is charged to the

Profit and Loss Account of the hire purchaser as loss on surrender.For the remaining port

Hire Purchase and Instalment Sale Transactions

Documents

Transcript of Hire Purchase and Instalment Sale Transactions