Hire Purchase Accounting

8/11/2019 Hire Purchase Accounting

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Hire Purchase Accounts


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Hire Purchase

Hire Purchase (HP) is one of thepayment methods of which the buyer

use the goods without immediate fullsettlement of the price of the goods


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With Hire Purchase Agreement

The HP selling price includes normalCash Price PLUS HP Interest

The seller agreed that the buyer couldhire the goods by payments of depositand instalments


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Hire Purchase Price

= Cash Price + Total Hire Purchase Interest

OR

= Deposit

(Down payment) +

Outstanding Balance

(including HP interestpaid by instalments


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Calculation of Hire PurchaseInterest

(a) Straight line method

(b) Actuarial Method

(c) Sum-of-digits Method


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Straight Line Method(Equal apportionment)

Interest is apportioned evenly over thenumber of installments agreed upon.

HP Interest per instalment

= Total HP Interest

Number of total instalments


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Example 1

An asset is acquired on the followingterms:

Cash price $9000

Down payment $1000

HP Price $12200

Nominal rate of interest 10%

Four annual instalments $2800


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Total HP interest = $12000-$9000 =$3200

HP interest payable per annum = $3200/4 = $800

OR

An alternative way to calculate hire purchase interest

($9000-$1000)*10% = $800

Year HP interest Capital Instalments

$ $ $

12

3

4

800800

800

800

28002800

2800

2800

20002000

2000

2000

+ =

Answer:


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B. Actuarial Method

Interest is charged on the outstandingbalance of the cash price after the down

payment is made.1. Equal instalments

2. Unequal instalment


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1 Equal instalment

Example 2

An asset is acquired on the following terms: Cash price $9000

Down payment $1000

HP price $11096 Interest 10% on outstanding balance

Four annual instalment $2524

Equal instament = HP priceDown payment

No. of instalment

(11096-1000)/4


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$ $ $

1

2

3

4

(9000-1000)*10% =800 2524

2524

2524

2524

1724

(8000+800-2524)*10%=628 1896

(6276+628-2524)*10%=438 2086

(4380+438-2524)*10%=230 2294

6276

4380 2096 8000 10096


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Unequal instalment

Example 3

An asset is acquired on the following terms:

Cash price $9000

Down payment $1000

HP price $11000 Interest 10% on outstanding balance

Four annual instament $2000+interest

Unequal instalment=Cash price-Down payment+Interest accrued

No. of instalment (i.e.unpaid interest)


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$ $ $

1

2

3

4

(9000-1000)*10% =800 2800

(8000+800-2800)*10%=600

(6000+600-2600)*10%=400

(4000+400-2400)*10%=200

6000

4000 2000 8000 10000

2000

2000

2000

2000

26002400

2200


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C. Sum of Digits Method

The HP interest is apportioned accordingto the digit assigned (descending order)

Using this method, more interest ischarged in the earlier periods, lessinterest is charged in the later periods.


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HP interest per instalment= Total HP interest* Digit assigned in the instalment

Sum-of-digits of total instalment

When n = number of instalments

Sum of digits = n(n+1)2


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Example 4

A motor vehicle was purchased under a hire purchase

agreement Cash price $10000

Hire Purchase $13600

Instalments 4 months

Date of sale 1 October 1996 Calculate the interest under each of the three cases:

(a) First instalment due at the end of month from thedate of sale

(b) First instalment due at the beginning of monthfollowing the date of sale

(c) First instalment due at the date of sale.


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Case (a) and (b)

Interest paid

1st instalment $3600*4/10=$14402nd instalment $3600*3/10=$1080

3rdinstalment $3600*2/10=$720

4thinstalment $3600*1/10=$360

Total HP interest =$13600-$10000=$3600

Sum of digit= 4*(4+1)/2=10


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Case ( C )

Interest paid

1st instalment $3600*3/6=$18002nd instalment $3600*2/6=$1200

3rdinstalment $3600*1/6=$600

4thinstalment -

Total HP interest =$13600-$10000=$3600

Sum of digit= 3*(3+1)/2=6


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Concept Chart

Hire Purchase

Buyer Seller

Assets

accountHire purchase

interest account

Hire purchase

creditors account

Hire purchaseinterest suspense

account

Hire purchase

sales

Provisionfor unrealized

profit

Hire purchase

debtors account


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Purchasers Books


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Acquisition of Assets on Hire Purchase

When an asset is acquired on hirepurchase, there are 2 ways to account forthis in the purchasers books.

1. Progress interest charge system

2. Interest Suspense Method

They differ mainly in the way they record

hire purchase interest.


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2 Method of HP Interest

Treatment

(i) Progress interest charge system

(ii) Interest suspense method

* 3 method of HP Interest

Apportionment

(i) Straight-line method

(ii) Actuarial method

(iii)Sum-of-digit method

= 6 Version


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Progress interest charge system

Interest is charged upon each instalment.


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Dr Fixed assets

Cr HP Creditor

With cash price of assets (at the

date of purchase)

Dr HP Creditor

Cr Bank

With deposit and instalment paid

Dr HP Interest

Cr HP Creditor

With hire purchase interest

accrued for the current year (at the

year end)Dr Profit and Loss

(expense)

Cr HP Interest

With the amount of hire purchase

interest transferred to current

years profit and loss account

Dr Profit and Loss

Cr Provision for

depreciation

Annual depreciation charged on

full cash price of the asset

Progress interest charge system:


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Notes :

Cut off of the financial period should be aware in order tocalculate the total hire purchase interest of the financial period

to be reflected in the P/L account as an expense item

Each financial year may include up to 12 monthly instalment,

4 quarterly instalment or 2 half-yearly instalment


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Balance Sheet Presentation

For instance: after 1stinstalment Paid

Progress interest charge system:

Balance Sheet ( Instalment for 1st year)

Current Liabilities

HP Creditor (Instalment for 2ndyear)

$

X

Long term Liabilities

HP Creditor (Instalment for 3rdyear and so on)X

Instalment for 2ndyearInterest payable for 2ndyear

Outstanding HP creditorHP creditor on current liabilities


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For instance: after 1stinstalment Paid

Interest Suspense Method:

Balance Sheet ( Instalment for 1st year)

Current Liabilities

HP Creditor (Instalment for 2ndyear)

$

X

Long term LiabilitiesHP Creditor (Instalment for 3rdyear and so on) X

Less HP interest suspense (X)

Less HP interest suspense (X)

X

X

Outstanding HP creditorInstalment for next year

Outstanding interest suspenseinterest

Payable for 2ndyear

Interest payable for 2ndyear


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Example

Refer to textbook P.24


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Example 6 ABC Ltd. purchased a vehicle from Grace Ltd. on 1

Jan 1996 on HP agreement. The details were asfollows

Cash price $9000

Down payment $1000

HP Price $11096

Nominal rate of interest 10% on outstanding balance

Four equal annual instalments

First due 31 Dec 1996 Depreciation 10% on cost

Using (a) the progress interest charge systemand(b) interest suspense method, show transactions in

books of ABC Ltd.


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Total HP interest= HP priceCash Price= 110969000

= 2096

Equal instalments = (110961000)/4

=2524

Answer (a):


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Hire purchase Creditor (Grace Ltd)

1/1/96 Vehicle 9,0001/1/96 Bank-deposit 1,000

31/12 HP Interest 800

(9000-1000)*10%

31/12 Bank-instalment 2,52431/12 Balance c/d 6,276

9,800 9,800

Hire Purchase Interest

31/12/96 HP Creditor 800 31/12/96 P/L 800


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Balance Sheet as at 31 Dec (Extract)

Fixed Assets 96

VehicleLess Pro for Dep

Current Liabilities

HP Creditor

9000

900

8100

1896

2524-628

Long Term Liabilities

HP Creditor 4380

6276-1896


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31/12 HP Interest 80031/12 Bank-instalment 2,524

31/12 Balance c/d 6,276

9,800 9,800

1/1/97 Balance b/d 6,276

31/12 HP Interest (6276*10%) 628

31/12 Bank-instalment 2,524

6,904

31/12 Balance 4,380

6,904


31/12/97 HP Creditor 628 31/12/97 P/L 628


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Fixed Assets 96

Vehicle

Less Pro for Dep

Current Liabilities

HP Creditor

9000

900

8100

97

9000

1800

7200

2086


HP Creditor

1896

4380

2524-438

2294

4380-2086



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31/12 HP Interest 80031/12 Bank-instalment 2,524

31/12 Balance c/d 6,276

9,800 9,800

1/1/97 Balance b/d 6,276

31/12 Hp Interest 628


6,90431/12 Balance 4,380

6,904

1/1/98 Balance b/d 4,380

31/12 HP interest(4380*10%) 438


31/12 Balance 2,294

4,8184,818


31/12/98 HP Creditor 438 31/12/98 P/L 438


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Fixed Assets 96

Vehicle

Less Pro for Dep

Current Liabilities

HP Creditor

9000

900

8100

1896

97

9000 9000

98

1800 2700

7200 6300

2086 2294


HP Creditor 4380 2294

2524-230

-

2294-2294



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1/1/96 Vehicle 9,0001/1/96 Bank-deposit 1,00031/12 HP Interest 80031/12 Bank-instalment 2,524

31/12 Balance c/d 6,276

9,800 9,800

1/1/97 Balance b/d 6,276

31/12 Hp Interest 628


6,904

31/12 Balance 4,380

6,904

1/1/98 Balance b/d 4,38031/12 HP interest(4380*10%) 438

31/12 Bank-instalment 2,52431/12 Balance 2,294

4,8184,818

1/1/99 Balance b/d 2294

31/12 HP interest(2294*10%) 230


25242524


31/12/99 HP Creditor 230 31/12/99 P/L 230


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Fixed Assets 96

Vehicle

Less Pro for Dep

Current Liabilities

HP Creditor

9000

900

8100

1896

97

9000 9000 9000

98 99

1800 2700 3600

7200 6300 5400

2086 2294 -


HP Creditor 4380 2294 - -


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Interest is recorded all together at thebeginning of hire purchase agreement

and charge proportionally to the profitand loss account every year.

Interest Suspense Method


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Dr Fixed assets

Dr HP Interest SuspenseCr HP Creditor

With the cash price of assets

With total hire purchase interestWith the hire purchase price

(at the date of purchase)

Dr HP Creditor

Cr Bank

With deposit and installments paid

Dr HP Interest

Cr HP Interest Suspense

With hire purchase interest accruedfor the current year (at the year end)

Dr Profit and Loss

Cr HP Interest

With the amount of hire purchase

interest transferred to current yearsprofit and loss account.

Dr Profit and Loss

Cr Provision fordepreciation

Annual depreciation charged basedon full cash price of the asset.

Interest Suspense Method:


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Example

Refer to textbook P.24


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Example 6 ABC Ltd. purchased a vehicle from Grace Ltd. on 1

Jan 1996 on HP agreement. The details were asfollows

Cash price $9000

Down payment $1000

HP Price $11096

Nominal rate of interest 10% on outstanding balance

Four equal annual instalments

First due 31 Dec 1996 Depreciation 10% on cost

Using (a) the progress interest charge system and (b)interest suspense method, show transactions in

books of ABC Ltd.


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Answer (b):

Total HP interest= HP priceCash Price= 110969000

= 2096

Equal instalments = (110961000)/4

=2524



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p ( )

1/1/96 Vehicle 9,0001/1/96 Bank-deposit 1,00031/12 Bank-instalment 2,524

31/12 Balance c/d 7572

9,800 9,800

1/1/96 HP Interest Suspense 2096

(11096-9000)


31/12/96 HP suspense 800 31/12/96 P/L 800

HP Interest Suspense31/12/96 HP Interest 800

(9000-1000)*10%

1/1/96 HP Creditor 2096

31/12/96 Bal c/d 1296

2096 2096

B l Sh t t 31 D (E t t)


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Current Liabilities

HP Creditor


96


HP Creditor

Less HP interest suspense25246281896

Less HP interest suspense

5048668

4380

7572-2524

(7572-1296)*10%

1296-628


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9,800 9,800

1/1/97 Balance b/d 757231/12 Bank-instalment 2,524

6,904


6,904


HP Interest Suspense


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p31/12/96 HP Interest 800

(9000-1000)*10%


31/12/96 Bal c/d 1296

2096 2096

31/12/97 HP Interest 628

(7572-1296)*10%

1/1/97 Bal b/d 1296

2096 2096

31/12/97 Bal c/d 668


31/12/97 HP Creditor 628 31/12/98 P/L 628

B l Sh t t 31 D (E t t)


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Current Liabilities

HP Creditor


96 97


HP Creditor


2524438

1896 2086


5048 2524668 230

4380 2294

5048-2524

(5048-668)*10%

668-438



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p ( )



9,800 9,800


6,904


6,904

1/1/98 Balance b/d 504831/12 Bank-instalment 2,52431/12 Balance c/d 2524

4,8184,818




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(9000-1000)*10%


31/12/96 Bal c/d 1296

2096 2096


(7572-1296)*10%

1/1/97 Bal b/d 1296

2096 2096

31/12/97 Bal c/d 668


(5048-668)*10%

1/1/98 Bal b/d 668

2096 2096

31/12/98 Bal c/d 230


31/12/98 HP Creditor 438 31/12/98 P/L 438



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Current Liabilities

HP Creditor


96 97 98


HP Creditor


2524 2524438 230

1896 22942086


5048 2524668 230

--

4380 2294 -

2524-2524

(2524-230)*10%

230-230



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9,800 9,800


6,904


6,904

1/1/98 Balance b/d 504831/12 Bank-instalment 2,52431/12 Balance c/d 2524

4,8184,818


25242524




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(9000-1000)*10%


31/12/96 Bal c/d 1296

2096 209631/12/97 HP Interest 628

(7572-1296)*10%

1/1/97 Bal b/d 1296

2096 2096

31/12/97 Bal c/d 668


(5048-668)*10%

1/1/98 Bal b/d 668

2096 2096

31/12/98 Bal c/d 230


(5048-668)*10%

1/1/99 Bal b/d 230


31/12/99 HP Creditor 230 31/12/99 P/L 230



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Current Liabilities

HP Creditor


96 97 98 99


HP Creditor


2524 2524 -438 230 -

1896 22942086 -


5048 2524668 230

--

-

-

4380 2294 - -

i i f i h


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B. Termination of a Hire Purchase

Agreement The buyer can terminate the hire purchase

agreement earlier by paying balance earlierthan the last installment date.

However, the buyer may also be forced toterminate the agreement earlier if the asset isscrapped due to its use.

Upon the termination of a hire purchaseagreement, a number of entries should bemade in the books.

The accounting treatments differ, dependingon which method is used to record hirepurchase interest.

1 P i t t h t


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1. Progress interest charge systemSummary of procedures

Dr HP creditorCr Bank

With the last payment to the HPcreditor

Dr HP interest

Cr HP creditor

With the HP interest and penaltycharges for early termination of thehire purchase contract

Dr DisposalCr Asset

With the cost of the asset

Dr Provision for depreciation

Cr Disposal

Transferring related depreciationprovision to the disposal account

Dr BankCr Disposal

With the insurance claim for thedisposal (if any)

Dr Profit and Loss

Cr Disposal

With the loss on the disposal(Reverse the entries for a profit ondisposal)


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Example 7

Example 7


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Example 7 Cash Price $5000

Prov for dep $3200

( A full year dep is charged in the year of purchase, but nonein the year of disposal)

HP creditor on 1 Jan 1996 $1800

Instalments $250(monthly)

Interest $50

The car was involved in an accident in May 1996resulting in a total write off, and the sum of $1000was received from the insurnance company.

All instalments up to and including 31 May werepaid.

A payment of $930 was made on 30 June 1996 infull settlement


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HP Creditor

1996 $ 1996 $

May 31 Bankinstalment 1250($250*5) Jan 1 Bal b/f 1800Dec 31 HP interest 300

($50*6)June30 Bank-settlement 930Dec 31 HP interest

-penalty 80

2180 2180

HP interest

1996 $ 1996 $Dec 31 HP Creditor

(300+80) 380 Dec 31 P/L 380


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Disposal of Vehicle

1996 $ 1996 $

Jun 30 Vehicle 5000

Dep - Vehicle

Vehicle

1996 $ 1996 $

1996 $ 1996 $

Jan b/f 5000 Jun 30 Disposal 5000

Jan 1 B/f 3200Jun 30 Disposal 3200

Jun 30 Dep 3200

Jun 30 Bank

- insurance 1000Dec 31 P/L - loss 800

5000 5000

I t t th d


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2. Interest suspense methodSummary of procedures

Dr HP CreditorCr Bank

With the last payment to the HP creditor

Dr HP interestCr HP interest suspense

With the HP interest for the current year

Dr HP CreditorCr Disposal

With any outstanding balance in the HPcreditor account

Dr DisposalCr HP Interest suspense

With any outstanding balance in the HPinterest suspense account

Dr DisposalCr Asset

With the cost of the asset

Dr Prov. for Depn.

Cr Disposal

Transferring the related depreciation

provision to the disposal accountDr BankCr Disposal

With the insurance claim for the disposal(if any)

Dr Profit and LossCr Disposal

With the loss on the disposal (Reverse theentries for a profit on disposal)


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Example 8

Example 8


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Example 8 Cash Price $5000

Prov for dep $3200

( A full year dep is charged in the year of purchase, but nonein the year of disposal)

HP creditor on 1 Jan 1996 $2250

Instalments $250(monthly)

Interest $50

HP interest suspense $450

The car was involved in an accident in May 1996 resulting ina total write off, and the sum of $1000 was received from theinsurnance company.

All instalments up to and including 31 May were paid. A payment of $930 was made on 30 June 1996 in full

settlement

HP Creditor


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1996 $ 1996 $

May 31 Bankinstalment 1250

($250*5)

Jan 1 Bal b/f 2250

June30 Bank-settlement 930

2250 2250

HP interest

1996 $ 1996 $

Dec 31 HP Creditor 300 Dec 31 P/L 300

Jun 30 Disposal 70

HP interest suspense1996 $ 1996 $

Jan 1 Bal/f 450 Jun 30 HP interest(60*5) 300

Jun 30 Disposal 150

450 450

Disposal of Vehicle


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1996 $ 1996 $

Jun 30 Vehicle 5000

Dep - Vehicle

Vehicle

1996 $ 1996 $

1996 $ 1996 $

Jan b/f 5000 Jun 30 Disposal 5000

Jan 1 B/f 3200Jun 30 Disposal 3200

Jun 30 Dep 3200

Jun 30 Bank

- insurance 1000

Dec 31 P/L - loss 8805000 5000

Jun 30 HP Creditor 70

Jun 30 HP interest

Suspense 150

Include the penalty charge $80

For early termination of HP


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Sellers Book


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2 Method of HP Interest

Treatment

(i) Profit Suspense Method(ii) HP Interest Suspense Method

* 3 method of HP Interest

Apportionment

(i) Straight-line method

(ii) Actuarial method

(iii)Sum-of-digit method

= 4 Version


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Hire Purchase Profit

HP profit= HP priceCash selling Price

Gross profit=Cash price-Cost of good

sold Total Profit=HP profit+Gross profit


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Interest Suspense Method

The characteristics of the interest suspensemethod are:

1. The hire purchase sale is recorded at the cash price

2. Profit is recognized immediately in the year of sale.3. The gross profit and interest income are accounted

for separately.

4. Interest income is allocated over the period of the

hire purchase agreement on a suitable basis.5. Only the amount of hire purchase interest receivable

in the current period is taken into account.


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Summary of procedures

Dr HP debtorsDr HP Sales

With the cash selling priceof thesale.

Dr HP debtor

Cr HP interest suspense

With the total HP interest

Dr BankCr HP debtors

With the deposit and installmentsreceived

Dr HP interest suspense

Cr HP interest / P&L(income)

With the hire purchase interestreceivable for the current period

Dr HP Sales

Cr HP Trading

Transfer the HP sales to HP trading

account


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Example 9


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Example 9

A company selling on HP has the following details: The interest is accrued evenly throughout the period

of HP agreement

The gross profit on the sales is recognized in the yearof sales

Sales volume 2 units

Date of sale 1 Jan 1996

Cash price $1200

HP price $2000

Cost $1000

Down payment NIL

Instalments $250*8 quarterly

First due 31 Mar 1996

HP Debtors1996 $ 1996 $


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1996 $ 1996 $Jan 1 HP Sales

($1200*2) 2400Jan 1 Interest suspense 1600

(2000-1200)*2

Dec 31 Bank-instalment

($250*4*2) 2000Dec 31 Bal c/d 2000

4000 4000HP Sales

1996 $ 1996 $

Dec 31 HP Trading 2400 Jan 1 HP Debtors 2400

HP interest suspense

1996 $ 1996 $Dec 31 HP interest

received

(2000-1200)*4/8*2 800

Jan 1 HP Debtors 1600

Dec 31 Bal c/d 8001600 1600

Cash price

HP interest received

1996 $ 1996 $Dec 31 P/L 800 Jan 1 HP int suspense 800

Trading and profit and loss account for the year ended (Extract)


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Sales (cash price)

$

96

2400Less: cost of goods sold 2000

400HP Gross profit

Add: HP interest received 800


$

96

Current AssetsHP Debtors

Less Interest suspense

2000

800

1200

HP Debtors


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1996 $ 1996 $Jan 1 HP Sales

($1200*2) 2400

Jan 1 Interest suspense 1600

(2000-1200)*2


($250*4*2) 2000

Dec 31 Bal c/d 2000

4000 4000

1997 1997

Jan 1 Bal b/d 2000 Dec 31 Bank- instalment 2000



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1996 $ 1996 $

Dec 31 HP interest

received(2000-1200)*4/8*2 800

Jan 1 HP Debtors 1600

Dec 31 Bal c/d 800

1600 1600

1997 1997Dec 31 HP interest 800

received

(2000-1200)*4/8*2

Jan 1 Bal b/d 800

Interest received

1996 $ 1996 $

Dec 31 HP interest suspense 800Dec 31 P/L 800



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Sales (cash price)

$ $

96 97

$ $


400HP Gross profit

Add: HP interest received 800

--

-

800


$ $

96 97


Less Interest suspense

2000

800

1200

-

-

-


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B. Profit suspense method

The profit suspense method has thefollowing characteristics:

1. The hire purchase sale is recorded at thehire purchase price.

2. The profit is recognized in proportion ofthe amount collected.

3. The gross profit and the interest incomeare not accounted for separately.

Summary of procedures:


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y p

Dr HP Debtors

Dr HP Sales

With the hire purchase price.

Dr BankCr HP Debtors

With the deposit and instalmentsreceived

Dr HP Sales

Cr HP Trading

Transfer the HP Sales to HPTrading a/c

Dr HP Trading

Cr Provision for Unrealizedprofit

With the increase in the provisionfor unrealized profit.

*Transfer the unearned totalprofit ( unearned HP profit &unearned GP)

Dr Provision for Unrealizedprofit

Cr HP trading

With the decrease in theprovision for unrealized profit.

* Transfer the unearned totalprofit (unearned HP profit &unearned GP)


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Provision for unrealized profit

= Total Profit * instalments not yet received

HP price

= (HP priceCost) * Instalments not yet received

HP price


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Example 10

E l 10


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Example 10

A company selling on HP has the following details: The gross profit on the sales is recognized on the

basis of the cash received



Cash price $1200

HP price $2000

Cost $1000

Down payment NIL




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Required:

Account prepared according to the following assumptions:

(a) All instalments were received for the years ended 31 Dec

1996 and 1997

(b) All instalments were received for the years ended 31 Dec1996 and 1997, except one in arrears as at 31 Dec 1996

which was received in 1997

HP DebtorsHP Price(a)


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1996 $ 1996 $Jan 1 HP Sales

($2000*2) 4000


($250*4*2) 2000Dec 31 Bal c/d 2000

4000 4000


1996 $ 1996 $Dec 31 Bal c/d 1000

($4000-2000)*2000/4000

Dec 31 HP Trading 1000



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Sales (HP price)

$ $

96


1000Gross profit

Balance Sheet as at 31 Dec (Extract)96


Less Provision for unreaslised

profit

20001000

1000

Less:Provision for unrealised

profit 1000

HP DebtorsHP Price(a)


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1996 $ 1996 $Jan 1 HP Sales

($2000*2) 4000


($250*4*2) 2000Dec 31 Bal c/d 2000

4000 40001997 1997



1996 $ 1996 $Dec 31 Bal c/d 1000

($4000-2000)*2000/4000


1997 $ 1997 $Dec 31 HP Trading 1000 Dec 31 Bal b/d 1000Dec 31 Bal c/d 0

($4000-2000)*0/4000 1000 1000



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g p y ( )

Sales (HP price)

$ $

96 97

$ $

4000

Less: cost of goods sold 2000

Gross profit

-


$ $

96 97

Current Assets

HP Debtors

Less Provision for unrealized

profit

20001000

1000

-

-

-

Less:Increase Provision forunrealized profit

1000

1000Add: Decrease in prov.for unrealized

profit

1000 1000

HP DebtorsHP Price(b)


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1996 $ 1996 $Jan 1 HP Sales

($2000*2) 4000


($250*4*2-250) 1750Dec 31 Bal c/d 2250

4000 4000


1996 $ 1996 $Dec 31 Bal c/d 1125

($4000-2000)*2250/4000




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g p y ( )

Sales (HP price)

$ $

96


875Gross profit



Less Provision for unrealized

profit

22501125

1125

Less:Provision for unrealized

profit 1125

HP DebtorsHP Price(b)


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1996 $ 1996 $Jan 1 HP Sales

($2000*2) 4000


($250*4*2-250) 1750Dec 31 Bal c/d 2250

4000 40001997 1997



1996 $ 1996 $Dec 31 Bal c/d 1125

($4000-2000)*2250/4000


1997 $ 1997 $Dec 31 HP Trading 1125 Dec 31 Bal b/d 1125Dec 31 Bal c/d 0

($4000-2000)*0/4000 1125 1125



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g p y ( )

Sales (HP price)

$ $

96 97

$ $

4000


Gross profit

-


$ $

96 97

Current Assets

HP Debtors

Less Provision for unreaslised

profit

22501125

-

-

-

Less:IncreaseProvision forunrealised profit

1125

1125Add: Decrease in prov.for unreasised

profit

875 1125

1125

C. A combination of the 2 methods


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The combination of 2 methods has the

following characteristics:1.The hire purchase sale is recorded at thecash price.

2.The profit is recognized in proportion ofthe amount collected.

3.The gross profit and the interest income

are accounted for separately.4.Interest income is allocated over theperiod of the hire purchase agreement ona suitable basis

Summary of procedures


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Dr HP debtors

Dr HP Sales

With the cash price.

Dr Bank

Cr HP debtor

With the deposit received

Dr Bank

Cr HP debtors

Cr Interest receivable

With the installments received.

With the capital part of the installments.

With the interest receivable for the currentperiod

Dr HP trading

Cr Provision for Unrealizedprofit

With the increase in the provision for

unrealized profit. (Reverse the entries for adecrease in the provision for unrealizedprofit)


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Provision for unrealised profit

= (Cash price Cost ) * Instalments not yet received

Cash Price


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Example 11

Example 11


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Example 11

A company selling on HP has the following details: The interest is accrued evenly throughout the period

of HP agreement

The gross profit on the sales is recognized in theaccounts on the basis of the amounts received



Cash price $1200

HP price $2000

Cost $1000

Down payment NIL




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Interest per instalment

= ($2000-1200)

8= $100

Instalment = Capital + Interest

$250 = $150 + $100

HP Debtors1996 $ 1996 $

CashPrice


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1996 $ 1996 $Jan 1 HP Sales

($1200*2) 2400


($250-100)*4*2 1200Dec 31 Bal c/d 1200

4000 4000

HP Interest Receivable

1996 $ 1996 $

Dec 31 P/L 800 Dec 31 Bank ($100*4*2) 800


1996 $ 1996 $Dec 31 Bal c/d 200

($2400-2000)*1200/2400


Trading and profit and loss account for the year ended (Extract)96


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Sales (cash price)

$ $

96


200HP profit


Current AssetsHP Debtors 1200

Less:Provision for unrealised

profit 200

Add: Interest received 800

HP Debtors1996 $ 1996 $

CashPrice


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1996 $ 1996 $Jan 1 HP Sales

($1200*2) 2400


($250-100)*4*2 1200

Dec 31 Bal c/d 1200

4000 4000

HP Interest Receivable

1997 $ 1997 $

Dec 31 P/L 800 Dec 31 Bank ($100*4*2) 800

1997 1997




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1996 $ 1996 $Dec 31 Bal c/d 200

($2400-2000)*1200/2400


1997 $ 1997 $Dec 31 Bal b/d 200Dec 31 HP Trading 200

Dec 31 Bal c/d 0($2400-2000)*0/2400

200 200

Trading and profit and loss account for the year ended (Extract)96


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Sales (cash price)

$ $

96 97

$ $

2400


Gross profit

-


$ $

96 97

Current Assets

HP Debtors1200 -

Less:IncreaseProvision forunrealised profit

200

200Add: Decrease in prov.for unreasised

profit

200 200

Add: Interest Received 800 800


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Repossession

R i


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Repossession

It may be happen that hire purchasedebtors cannot make all of the

payments required under the agreement. Once the hire purchase debtor stops

paying the instalments, the seller can

take away the goods. This is calledrepossession.

Dr RepossessionCr HP Creditor

With the outstanding balance for theparticular HP debtors


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Interest suspense method

Dr HP interest suspenseCr Repossession

Profit suspense method

Dr Provision for unrealizedprofitCr Repossession

The combined method

Dr RepossessionCr interest Receivable

With the HP interest not yet received

With the outstanding provisiontransferred

With the amount of accrued HP interest

Dr Trading

Cr Repossession

With the value of the repossessed item

which is taken back into stockDr BankCr Repossession

With the insurance claim or any saleproceeds for the repossessed item.

Dr Profit and lossCr Repossession

With the loss on the repossession(Reverse the entries for a profit on

repossession)


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The value of the repossessed item

Cost * Outstanding balance of the particular HP

HP price debtor ( repossessed items)=


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(a) Using interest suspense method

Example 12 (a) A company selling on HP has the following details:

Th i t t i d l th h t th i d


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The interest is accrued evenly throughout the periodof HP agreement

The gross profit on the sales is recognized in the yearof sales



Cash price $1200

HP price $2000

Cost $1000

Down payment NIL

Instalments $250*8 quarterly First due 31 Mar 1996

All the instalments were received on the due dates,except that payments on one of the items have beendefault since 31 Mar 1997. The repossessed item

has been taken back into stock

HP Debtors1997 $ 1997 $Jan 1 Bal b/d 2000 Mar 31 Repossession 1000


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2000 2000

Jan 1 Bal b/d 2000

Dec 31 Bank- instalment 1000Mar 31 Repossession 1000


1997 $ 1997 $

800 800

Dec 31 HP interest 400

received(2000-1200)*4/8*1

Jan 1 Bal b/d 800Mar 31 Repossession 400

Repossession

1997 $ 1997 $

Mar 31 HP Debtors 1000 Mar 31 HP int. suspense 400($800-$400)Dec 31 HP Trading 500

($1000*1000/2000)

Value of

Repossessed items

Dec 31 P/L-loss on repossession 100

1000 1000


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(b) Using profit suspense method

Example 12(b) A company selling on HP has the following details:


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A company selling on HP has the following details:

The gross profit on the sales is recognized on thebasis of the cash received



Cash price $1200

HP price $2000

Cost $1000

Down payment NIL



All instalments were received on the due dates,except that payments on one of the items have beenin default since 31 Mar 1997. The repossessed itemhas been taken back into stock.

HP Debtors1997 $ 1997 $

Jan 1 Bal b/d 2000 Mar 31 Repossession 1000


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Jan 1 Bal b/d 2000

Dec 31 Bank- instalment 1000

Mar 31 Repossession 1000

Repossession

1997 $ 1997 $

Mar 31 HP Debtors 1000 Mar 31 Prov. for unrealised 500

profit(2000-1000)*1000/2000


($1000*1000/2000)1000 1000

Provision for unrealisedprofit

1997 $ 1997 $

800 800


Jan 1 Bal b/d 1000Mar 31 Repossession 500

Value of

Repossessed items

Dec 31 Bal c/d 0(2000-1000)*0/2000

2000 2000


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(c) Using the combined method

Example 12(c)



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The interest is accrued evenly throughout the period

of HP agreement The gross profit on the sales is recognized in the

accounts on the basis of the amounts received



Cash price $1200

HP price $2000

Cost $1000

Down payment NIL




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All the instalments were received on the due dates,except that payments on one of the item has beenin default since 31 Mar 1997

1. The seller repossessed the goods on the same

date (31 Mar 1997)as that the HP debtor defaultedon the payment

2. The seller repossessed the goods on 31 June1997, after the HP debtor defaulted on the payment

(1)HP Debtors

1997 $ 1997 $Jan 1 Bal b/d 1200 Mar 31 Repossession 600


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1200 1200


($250-100)*4

Mar 31 Repossession 600

Interest receivable

1997 $ 1997 $Dec 31 Bank ($100*4) 400Dec 31 P/L 400

Repossession

1997 $ 1997 $

Mar 31 HP Debtors 600$1200-(250-100)*4 Dec 31 HP Trading 500($1000*1000/1200)

Value of

Repossessed items


600 600

(2) 1997 $ 1997 $Jan 1 Bal b/d 1200 June30 Repossession 600

HP Debtors


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1200 1200


($250-100)*4

June30 Repossession 600

Interest receivable

1997 $ 1997 $

Dec 31 Bank ($100*4) 400

Dec 31 P/L 600

Repossession

1997 $ 1997 $June 30 HP Debtors 600$1200-(250-100)*4


($1000*1000/1200)

Value of

Repossessed items


600 600

June 30 Repossession 200

($100*2)

June 30 Interest 200

receivable

600 600


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Hire Purchase Trading andProfit and loss account

Interest suspense method and thecombined method


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x

x

x

x

x

xx

Hire Purchase Trading$ $

Purchase

Add Repossession

Less closing stock

Cost of Goods sold

Gross profit

Salescash price x

x

combined method


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xx

Profit and Loss (Extract)$ $

Loss on RepossessionHP interestProfit on Repossession

HP profitx

x

Profit suspense method


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x

x

xx

x

xx

Hire Purchase Trading$ $

Purchase

Add Repossession

Less closing stock

Cost of Goods sold

Gross profit

SalesHP price x

x

Provision for Unrealized profit x


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xx

Profit and Loss (Extract)$ $

Loss on RepossessionProfit on RepossessionHP profit

x

ABC Ltd. Purchased a vehicle from Grace ltd. On Jan 1996

on hire purchase agreement. The details were as follows:


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Cash price $9,000

HP price $11,096

Down payment $1,000

Instalment 4 equal annual instalments

First due 31 December 1996

Interest 10% on outstanding balance

Depreciation 10% on cost

U i ( ) h i h d

Documents

Hire Purchase Accounting