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11 Hire Purchase and Installment Sale Transactions BASIC CONCEPTS Hire Purchase Accounting Under Hire Purchase System, hire purchaser will pay cost of purchased asset in installments. The ownership of the goods will be transferred by the Hire Vendor only after payment of outstanding balance. Under installment system, ownership of the goods is transferred by owner on the date of delivery of goods. Accounting Methods under Hire Purchase System Cash price Method Interest suspense Method Question 1 A acquired on 1st January, 2011 a machine under a Hire-Purchase agreement which provides for 5 half-yearly instalments of ` 6,000 each, the first instalment being due on 1st July, 2011. 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. Answer Statement showing cash value of the machine acquired on hire-purchase basis Instalment Amount Interest @ 5% half yearly (10% p.a.) = 5/105 = 1/21) (in each instalment) Principal Amount (in each instalment) ` ` ` 5th Instalment 6,000 286 5,714 Less: Interest (286) 5,714 © The Institute of Chartered Accountants of India

11 Hire Purchase and Installment Sale Transactions · 11 Hire Purchase and Installment Sale Transactions. BASIC CONCEPTS Hire Purchase Accounting . Under Hire Purchase System, hire

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Page 1: 11 Hire Purchase and Installment Sale Transactions · 11 Hire Purchase and Installment Sale Transactions. BASIC CONCEPTS Hire Purchase Accounting . Under Hire Purchase System, hire

11 Hire Purchase and Installment Sale Transactions

BASIC CONCEPTS

Hire Purchase Accounting

Under Hire Purchase System, hire purchaser will pay cost of purchased asset in installments. The ownership of the goods will be transferred by the Hire Vendor only after payment of outstanding balance.

Under installment system, ownership of the goods is transferred by owner on the date of delivery of goods.

Accounting Methods under Hire Purchase System

• Cash price Method

• Interest suspense Method

Question 1

A acquired on 1st January, 2011 a machine under a Hire-Purchase agreement which provides for 5 half-yearly instalments of ` 6,000 each, the first instalment being due on 1st July, 2011. 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.

Answer

Statement showing cash value of the machine acquired on hire-purchase basis

Instalment Amount

Interest @ 5% half yearly (10% p.a.) = 5/105 = 1/21) (in each instalment)

Principal Amount (in each instalment)

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

© The Institute of Chartered Accountants of India

Page 2: 11 Hire Purchase and Installment Sale Transactions · 11 Hire Purchase and Installment Sale Transactions. BASIC CONCEPTS Hire Purchase Accounting . Under Hire Purchase System, hire

11.2 Accounting

Add: 4th Instalment 6,000 11,714 558 5,442 Less: Interest (558) (11,156–5,714) 11,156 Add: 3rd instalment 6,000 17,156 817 5,183 Less: Interest (817) (16,339–11,156) 16,339 Add: 2nd instalment 6,000 22,339 1,063 4,937 Less: Interest (1,063) (21,276–16,339) 21,276 Add: 1st instalment 6,000 27,276 1,299 4,701 Less: Interest (1,299) (25,977–21,276) 25,977 4,023 25,977

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

Question 2 On 1st April, 2012, Fastrack Motors Co. sells a truck on hire purchase basis to Teja Transport Co. for a total hire purchase price of ` 9,00,000 payable as to ` 2,40,000 as down payment and the balance in three equal annual instalments of ` 2,20,000 each payable on 31st March 2013, 2014 and 2015. The hire vendor charges interest @ 10% per annum. You are required to ascertain the cash price of the truck for Teja Transport Co. Calculations may be made to the nearest rupee. Answer

Ratio of interest and amount due = Rate of int erest 10 111100 Rate of int erest 110

= =+

There is no interest element in the down payment as it is paid on the date of the transaction. Instalments paid after certain period includes interest portion also. Therefore, to ascertain cash price, interest will be calculated from last instalment to first instalment as follows: Calculation of Interest and Cash Price

No. of Amount due at the time Interest Cumulative

© The Institute of Chartered Accountants of India

Page 3: 11 Hire Purchase and Installment Sale Transactions · 11 Hire Purchase and Installment Sale Transactions. BASIC CONCEPTS Hire Purchase Accounting . Under Hire Purchase System, hire

Hire Purchase and Installment Sale Transactions 11.3

instalments of instalment Cash price [1] [2] [3] (2-3) = [4] 3rd 2,20,000 1/11 of ` 2,20,000 =` 20,000 2,00,000 2nd 4,20,000 [W.N.1] 1/11 of ` 4,20,000= ` 38,182 3,81,818 1st 6,01,818 [W.N.2] 1/11of ` 6,01,818= ` 54,711 5,47,107

Total cash price = ` 5,47,107+ 2,40,000 (down payment) =` 7,87,107. Working Notes: 1. ` 2,00,000+ 2nd instalment of ` 2,20,000= ` 4,20,000. 2. ` 3,81,818+ 1st instalment of ` 2,20,000= ` 6,01,818.

© The Institute of Chartered Accountants of India