Hire Purchase Accounts

Hire Purchase Accounts

Hire Purchase

Hire Purchase (HP) is one of the payment methods of which the buyer use the goods without immediate full settlement of the price of the goods

With Hire Purchase Agreement

The HP selling price includes normal Cash Price PLUS HP Interest

The seller agreed that the buyer could hire the goods by payments of ‘deposit’ and ‘instalments’

Hire Purchase Price

= Cash Price + Total Hire Purchase Interest

OR

= Deposit(Down payment)

+Outstanding Balance(including HP interestpaid by instalments

Calculation of Hire Purchase Interest

(a) Straight line method(b) Actuarial Method(c) Sum-of-digits Method

Straight Line Method(Equal apportionment)

• Interest is apportioned evenly over the number of installments agreed upon.

HP Interest per instalment = Total HP Interest Number of total instalments

Example 1

An asset is acquired on the following terms:

Cash price $9000 Down payment $1000 HP Price $12200 Nominal rate of interest 10% Four annual instalments $2800

Total HP interest = $12000-$9000 =$3200HP 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 $ $ $ 1 2 3 4

800800800800

2800280028002800

2000200020002000

+ =

Answer:

B. Actuarial Method

Interest is charged on the outstanding balance of the cash price after the down payment is made.

1. Equal instalments2. Unequal instalment

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 price – Down payment No. of instalment

(11096-1000)/4


(9000-1000)*10% =800 2524252425242524

1724(8000+800-2524)*10%=628 1896(6276+628-2524)*10%=438 2086(4380+438-2524)*10%=230 2294

6276

4380 2096 8000 10096

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)


(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

2000200020002000

260024002200

C. Sum of Digits Method

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

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

HP interest per instalment = Total HP interest* Digit assigned in the instalment Sum-of-digits of total instalment

When n = number of instalmentsSum of digits = n(n+1) 2

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 the d

ate of sale (b) First instalment due at the beginning of month follo

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

Case (a) and (b) Interest paid

1st instalment $3600*4/10=$14402nd instalment $3600*3/10=$10803rd instalment $3600*2/10=$7204th instalment $3600*1/10=$360

Total HP interest =$13600-$10000=$3600Sum of digit= 4*(4+1)/2=10

Case ( C ) Interest paid

1st instalment $3600*3/6=$18002nd instalment $3600*2/6=$12003rd instalment $3600*1/6=$6004th instalment -

Total HP interest =$13600-$10000=$3600Sum of digit= 3*(3+1)/2=6

Concept ChartHire Purchase

Buyer Seller

Assetsaccount

Hire purchaseinterest account

Hire purchasecreditors account

Hire purchaseinterest suspense

account

Hire purchasesales

Provisionfor unrealized

profit

Hire purchasedebtors account

Purchaser’s Books

Acquisition of Assets on Hire Purchase

• When an asset is acquired on hire purchase, there are 2 ways to account for this in the purchaser’s books.

1. Progress interest charge system2. Interest Suspense Method• They differ mainly in the way they record

hire purchase interest.

2 Method of HP Interest Treatment

(i) Progress interest charge system(ii) Interest suspense method

*3 method of HP InterestApportionment

(i) Straight-line method(ii) Actuarial method(iii) Sum-of-digit method

= 6 Version

Progress interest charge system

Interest is charged upon each instalment.

Dr Fixed assetsCr HP Creditor

With cash price of assets (at the date of purchase)

Dr HP CreditorCr Bank

With deposit and instalment paid

Dr HP InterestCr 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 year’s profit and loss account

Dr Profit and LossCr Provision for depreciation

Annual depreciation charged on full cash price of the asset

Progress interest charge system:

Notes :•Cut off of the financial period should be aware in order to calculate 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

Balance Sheet Presentation

For instance: after 1st instalment Paid Progress interest charge system:

Balance Sheet ( Instalment for 1st year)Current LiabilitiesHP Creditor (Instalment for 2nd year)

$X

Long term LiabilitiesHP Creditor (Instalment for 3rd year and so on)

X

Instalment for 2nd year – Interest payable for 2nd year

Outstanding HP creditor – HP creditor on current liabilities

For instance: after 1st instalment Paid Interest Suspense Method:

Balance Sheet ( Instalment for 1st year)Current LiabilitiesHP Creditor (Instalment for 2nd year)

$X

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

Less HP interest suspense (X)

Less HP interest suspense (X)

X

X

Outstanding HP creditor – Instalment for next year

Outstanding interest suspense – interestPayable for 2nd year

Interest payable for 2nd year

Example

Refer to textbook P.24

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

n 1996 on HP agreement. The details were as follows Cash price $9000 Down payment $1000 HP Price $11096 Nominal rate of interest 10% on outstanding balanc

e 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.

Total HP interest= HP price – Cash Price = 11096 – 9000 = 2096

Equal instalments = (11096 –1000)/4 =2524

Answer (a):

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 2,524

31/12 Balance c/d 6,276

9,800 9,800

Hire Purchase Interest

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

Balance Sheet as at 31 Dec (Extract)

Fixed Assets 96VehicleLess Pro for Dep

Current LiabilitiesHP Creditor

9000900

8100

1896

2524-628

Long Term LiabilitiesHP Creditor 4380

6276-1896


31/12 HP Interest 800 31/12 Bank-instalment 2,524

31/12 Balance c/d 6,276

9,800 9,800

1/1/97 Balance b/d 6,27631/12 HP Interest (6276*10%) 628


6,90431/12 Balance 4,380 6,904


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




9000900

8100

97

900018007200

2086

Long Term LiabilitiesHP Creditor

1896

4380

2524-438

22944380-2086

Hire purchase Creditor (Grace Ltd)1/1/96 Vehicle 9,000

1/1/96 Bank-deposit 1,000

31/12 HP Interest 800 31/12 Bank-instalment 2,524

31/12 Balance c/d 6,276

9,800 9,800

1/1/97 Balance b/d 6,27631/12 Hp Interest 628


6,90431/12 Balance 4,380 6,904

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

31/12 Bank-instalment 2,524 31/12 Balance 2,294

4,8184,818


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




9000900

8100

1896

97

9000 9000

98

1800 27007200 6300

2086 2294

Long Term LiabilitiesHP Creditor 4380 2294

2524-230

-

2294-2294

Hire purchase Creditor (Grace Ltd)1/1/96 Vehicle 9,0001/1/96 Bank-deposit 1,000 31/12 HP Interest 800 31/12 Bank-instalment 2,524

31/12 Balance c/d 6,2769,800 9,800

1/1/97 Balance b/d 6,27631/12 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 2,524 31/12 Balance 2,294

4,8184,818

1/1/99 Balance b/d 229431/12 HP interest(2294*10%) 230


25242524Hire Purchase Interest

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




9000900

8100

1896

97

9000 9000 9000

98 99

1800 2700 3600

7200 6300 5400

2086 2294 -

Long Term LiabilitiesHP Creditor 4380 2294 - -

Interest is recorded all together at the beginning of hire purchase agreement and charge proportionally to the profit and loss account every year.

Interest Suspense Method

Dr Fixed assetsDr HP Interest SuspenseCr HP Creditor

With the cash price of assetsWith total hire purchase interestWith the hire purchase price(at the date of purchase)


With deposit and installments paid

Dr HP InterestCr HP Interest Suspense

With hire purchase interest accrued for the current year (at the year end)

Dr Profit and LossCr HP Interest

With the amount of hire purchase interest transferred to current year’s profit and loss account.

Dr Profit and LossCr Provision for depreciation

Annual depreciation charged based on full cash price of the asset.

Interest Suspense Method:

Example

Refer to textbook P.24

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

n 1996 on HP agreement. The details were as follows Cash price $9000 Down payment $1000 HP Price $11096 Nominal rate of interest 10% on outstanding balanc

e 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.

Answer (b):

Total HP interest= HP price – Cash Price = 11096 – 9000 = 2096

Equal instalments = (11096 –1000)/4 =2524


31/12 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



96


Less HP interest suspense2524628

1896


4380

7572-2524

(7572-1296)*10%

1296-628



9,800 9,800

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

6,904

31/12 Balance c/d 50486,904



(9000-1000)*10%1/1/96 HP Creditor 2096

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



96 97



2524438

1896 2086

Less HP interest suspense5048 2524668 230

4380 2294

5048-2524

(5048-668)*10%

668-438



9,800 9,800


6,904

31/12 Balance c/d 50486,904

1/1/98 Balance b/d 504831/12 Bank-instalment 2,524 31/12 Balance c/d 2524

4,8184,818



(9000-1000)*10%1/1/96 HP Creditor 2096

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

31/12/98 HP Interest 438

(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



96 97 98



2524 2524438 230

1896 22942086


--

4380 2294 -

2524-2524(2524-230)*10%

230-230



9,800 9,800


6,904

31/12 Balance c/d 50486,904

1/1/98 Balance b/d 504831/12 Bank-instalment 2,524 31/12 Balance c/d 2524

4,8184,818


25242524



(9000-1000)*10%1/1/96 HP Creditor 2096

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 31/12/98 HP Interest 438

(5048-668)*10%

1/1/98 Bal b/d 668

2096 2096

31/12/98 Bal c/d 230

31/12/98 HP Interest 230

(5048-668)*10%1/1/99 Bal b/d 230


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



96 97 98 99



2524 2524 -438 230 -

1896 22942086 -


-- -

-

4380 2294 - -

B. Termination of a Hire Purchase Agreement The buyer can terminate the hire purchase

agreement earlier by paying balance earlier than the last installment date.

However, the buyer may also be forced to terminate the agreement earlier if the asset is scrapped due to its use.

Upon the termination of a hire purchase agreement, a number of entries should be made in the books.

The accounting treatments differ, depending on which method is used to record hire purchase interest.

1. Progress interest charge systemSummary of procedures

Dr HP creditorCr Bank

With the last payment to the HP creditor

Dr HP interestCr HP creditor

With the HP interest and penalty charges for early termination of the hire purchase contract

Dr DisposalCr Asset

With the cost of the asset

Dr Provision for depreciationCr Disposal

Transferring related depreciation provision to the disposal account

Dr BankCr Disposal

With the insurance claim for the disposal (if any)

Dr Profit and LossCr Disposal

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

Example 7

Example 7 Cash Price $5000 Prov for dep $3200 ( A full year dep is charged in the year of purchase, but none i

n 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 1996 r

esulting in a total write off, and the sum of $1000 was received from the insurnance 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 Creditor1996 $ 1996 $May 31 Bank –instalment 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

Disposal of Vehicle1996 $ 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 3200Jun 30 Bank - insurance 1000

Dec 31 P/L - loss 8005000 5000

2. Interest suspense methodSummary of procedures


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 HP creditor account

Dr DisposalCr HP Interest suspense

With any outstanding balance in the HP interest 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 account

Dr Bank Cr Disposal

With the insurance claim for the disposal (if any)

Dr Profit and LossCr Disposal

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

Example 8

Example 8 Cash Price $5000 Prov for dep $3200 ( A full year dep is charged in the year of purchase, but none i

n 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 in

a total write off, and the sum of $1000 was received from the insurnance company.

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

ment

HP Creditor1996 $ 1996 $May 31 Bank –instalment 1250 ($250*5)

Jan 1 Bal b/f 2250

June30 Bank-settlement 930

2250 2250

HP interest1996 $ 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) 300Jun 30 Disposal 150

450 450

Disposal of Vehicle1996 $ 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 3200Jun 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 $80For early termination of HP

Seller’s Book

2 Method of HP Interest Treatment(i) Profit Suspense Method(ii) HP Interest Suspense Method

*3 method of HP InterestApportionment

(i) Straight-line method(ii) Actuarial method(iii) Sum-of-digit method

= 4 Version

Hire Purchase Profit

HP profit= HP price – Cash selling Price Gross profit=Cash price-Cost of good

sold Total Profit=HP profit+Gross profit

Interest Suspense Method

The characteristics of the interest suspense method are:

1. The hire purchase sale is recorded at the cash price2. 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.

Summary of procedures

Dr HP debtorsDr HP Sales

With the cash selling price of the sale.

Dr HP debtorCr HP interest suspense

With the total HP interest

Dr Bank Cr HP debtors

With the deposit and installments received

Dr HP interest suspenseCr HP interest / P&L(income)

With the hire purchase interest receivable for the current period

Dr HP SalesCr HP Trading

Transfer the HP sales to HP tradingaccount

Example 9

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 year

of 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 $Jan 1 HP Sales ($1200*2) 2400

Jan 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 suspense1996 $ 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 received1996 $ 1996 $Dec 31 P/L 800 Jan 1 HP int suspense 800

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

Sales (cash price) $

96

2400Less: cost of goods sold 2000

400HP Gross profitAdd: HP interest received 800


$ 96

Current AssetsHP DebtorsLess Interest suspense

2000800

1200


Jan 1 Interest suspense 1600 (2000-1200)*2


4000 4000

1997 1997Jan 1 Bal b/d 2000 Dec 31 Bank- instalment 2000

HP interest suspense1996 $ 1996 $Dec 31 HP interest received (2000-1200)*4/8*2 800

Jan 1 HP Debtors 1600

Dec 31 Bal c/d 800

1600 16001997 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


Sales (cash price)$ $

96 97$ $


400HP Gross profitAdd: HP interest received 800

---

800


$ $96 97

Current AssetsHP DebtorsLess Interest suspense

2000800

1200

---

B. Profit suspense method

The profit suspense method has the following characteristics:

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

2. The profit is recognized in proportion of the amount collected.

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

Summary of procedures:Dr HP DebtorsDr HP Sales

With the hire purchase price.

Dr BankCr HP Debtors

With the deposit and instalments received

Dr HP SalesCr HP Trading

Transfer the HP Sales to HP Trading a/c

Dr HP TradingCr Provision for Unrealized profit

With the increase in the provision for unrealized profit.*Transfer the unearned total profit ( unearned HP profit & unearned GP)

Dr Provision for Unrealized profitCr HP trading

With the decrease in the provision for unrealized profit.* Transfer the unearned total profit (unearned HP profit & unearned GP)

Provision for unrealized profit

= Total Profit * instalments not yet received

HP price

= (HP price – Cost) * Instalments not yet received

HP price

Example 10

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 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

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 Dec 1996 and 1997, except one in arrears as at 31 Dec 1996 which was received in 1997



4000 4000

HP Price(a)

Provision for unrealized profit1996 $ 1996 $

Dec 31 Bal c/d 1000 ($4000-2000)*2000/4000

Dec 31 HP Trading 1000


Sales (HP price)$ $

96


1000Gross profit

Balance Sheet as at 31 Dec (Extract) 96

Current AssetsHP DebtorsLess Provision for unreaslised profit

20001000

1000

Less:Provision for unrealised profit 1000



4000 40001997 1997

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

HP Price(a)


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


Sales (HP price)$ $

96 97$ $

4000

Less: cost of goods sold 2000

Gross profit

-


$ $96 97

Current AssetsHP DebtorsLess Provision for unrealized profit

20001000

1000

---

Less:Increase Provision for unrealized profit

1000

1000Add: Decrease in prov.for unrealized profit

1000 1000


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

4000 4000

HP Price(b)


Dec 31 Bal c/d 1125 ($4000-2000)*2250/4000



Sales (HP price)$ $

96


875Gross profit


Current AssetsHP DebtorsLess Provision for unrealized profit

22501125

1125

Less:Provision for unrealized profit 1125


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

4000 40001997 1997


HP Price(b)


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


Sales (HP price)$ $

96 97$ $

4000


Gross profit

-


$ $96 97

Current AssetsHP DebtorsLess Provision for unreaslised profit

22501125

---

Less:IncreaseProvision for unrealised profit

1125

1125Add: Decrease in prov.for unreasised profit

875 1125

1125

C. A combination of the 2 methodsThe combination of 2 methods has the following characteristics:

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

2.The profit is recognized in proportion of the amount collected.

3.The gross profit and the interest income are accounted for separately.

4.Interest income is allocated over the period of the hire purchase agreement on a suitable basis

Summary of procedures

Dr HP debtorsDr HP Sales

With the cash price.

Dr BankCr HP debtor

With the deposit received

Dr BankCr HP debtorsCr Interest receivable

With the installments received.With the capital part of the installments.With the interest receivable for the current period

Dr HP tradingCr Provision for Unrealized profit

With the increase in the provision for unrealized profit. (Reverse the entries for a decrease in the provision for unrealized profit)

Provision for unrealised profit

= (Cash price – Cost ) * Instalments not yet received Cash Price

Example 11

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 the

accounts on the basis of the amounts received 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

Interest per instalment= ($2000-1200) 8= $100

Instalment = Capital + Interest

$250 = $150 + $100


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

4000 4000

CashPrice

HP Interest Receivable

1996 $ 1996 $Dec 31 P/L 800 Dec 31 Bank ($100*4*2) 800


Dec 31 Bal c/d 200 ($2400-2000)*1200/2400




96


200HP profit


Current AssetsHP Debtors 1200

Less:Provision for unrealised profit 200

Add: Interest received 800


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

4000 4000

CashPrice

HP Interest Receivable

1997 $ 1997 $Dec 31 P/L 800 Dec 31 Bank ($100*4*2) 800

1997 1997



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



96 97$ $

2400


Gross profit

-


$ $96 97

Current AssetsHP Debtors 1200 -

Less:IncreaseProvision for unrealised profit

200

200Add: Decrease in prov.for unreasised profit

200 200Add: Interest Received 800 800

Repossession

Repossession

It may be happen that hire purchase debtors 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 called repossession.

Dr RepossessionCr HP Creditor

With the outstanding balance for the particular HP debtors

Interest suspense methodDr HP interest suspenseCr Repossession

Profit suspense methodDr Provision for unrealized profitCr Repossession

The combined methodDr RepossessionCr interest Receivable

With the HP interest not yet received

With the outstanding provision transferred

With the amount of accrued HP interest

Dr TradingCr Repossession

With the value of the repossessed item which is taken back into stock

Dr BankCr Repossession

With the insurance claim or any sale proceeds for the repossessed item.

Dr Profit and lossCr Repossession

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

The value of the repossessed item

Cost * Outstanding balance of the particular HP HP price debtor ( repossessed items)=

(a) Using interest suspense method

Example 12 (a) 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 year

of 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 All the instalments were received on the due dates,

except that payments on one of the items have been default since 31 Mar 1997. The repossessed item has been taken back into stock

HP Debtors1997 $ 1997 $

2000 2000

Jan 1 Bal b/d 2000 Dec 31 Bank- instalment 1000Mar 31 Repossession 1000

HP interest suspense1997 $ 1997 $

800 800

Dec 31 HP interest 400 received (2000-1200)*4/8*1

Jan 1 Bal b/d 800Mar 31 Repossession 400

Repossession1997 $ 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 1001000 1000

(b) Using profit suspense method

Example 12(b) A company selling on HP has the following details: The gross profit on the sales is recognized on the

basis of the cash received 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 All instalments were received on the due dates,

except that payments on one of the items have been in default since 31 Mar 1997. The repossessed item has been taken back into stock.

HP Debtors1997 $ 1997 $Jan 1 Bal b/d 2000

Dec 31 Bank- instalment 1000Mar 31 Repossession 1000

Repossession1997 $ 1997 $Mar 31 HP Debtors 1000 Mar 31 Prov. for unrealised 500

profit (2000-1000)*1000/2000 Dec 31 HP Trading 500 ($1000*1000/2000)

1000 1000

Provision for unrealised profit1997 $ 1997 $

800 800


Jan 1 Bal b/d 1000Mar 31 Repossession 500


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

2000 2000

(c) Using the combined method

Example 12(c) 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

accounts on the basis of the amounts received 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

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

1. The seller repossessed the goods on the same date (31 Mar 1997)as that the HP debtor defaulted on the payment

2. The seller repossessed the goods on 31 June 1997, after the HP debtor defaulted on the payment

(1)HP Debtors

1997 $ 1997 $

1200 1200

Jan 1 Bal b/d 1200 Dec 31 Bank- instalment 600 ($250-100)*4

Mar 31 Repossession 600

Interest receivable1997 $ 1997 $

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

Repossession1997 $ 1997 $Mar 31 HP Debtors 600 $1200-(250-100)*4

Dec 31 HP Trading 500($1000*1000/1200)


Dec 31 P/L-loss on repossession 100

600 600

(2) 1997 $ 1997 $

1200 1200

Jan 1 Bal b/d 1200 Dec 31 Bank- instalment 600 ($250-100)*4

June30 Repossession 600

Interest receivable1997 $ 1997 $

Dec 31 Bank ($100*4) 400

Dec 31 P/L 600

Repossession1997 $ 1997 $June 30 HP Debtors 600 $1200-(250-100)*4

Dec 31 HP Trading 500($1000*1000/1200)


Dec 31 P/L-loss on repossession 300

600 600

HP Debtors

June 30 Repossession 200 ($100*2)

June 30 Interest 200 receivable

600 600

Hire Purchase Trading and Profit and loss account

x

x

xx

x

xx

Hire Purchase Trading$ $

PurchaseAdd Repossession

Less closing stockCost of Goods soldGross profit

Sales – cash price x

x

Interest suspense method and the combined method

xx

Profit and Loss (Extract)$ $

Loss on RepossessionHP interestProfit on Repossession

HP profitxx

x

x

xx

x

xx

Hire Purchase Trading$ $

PurchaseAdd Repossession

Less closing stockCost of Goods sold

Gross profit

Sales – HP price x

x

Provision for Unrealized profit x

Profit suspense method

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:

Cash price $9,000

HP price $11,096

Down payment $1,000Instalment 4 equal annual instalments

First due 31 December 1996Interest 10% on outstanding balance

Depreciation 10% on cost

Using (a) the progress interest charge system and (b) interest suspense method

Documents

Hire Purchase Accounts