2. Hire Purchase Accounts

3. 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

4. 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 ’

5. Hire Purchase Price = Cash Price + Total Hire Purchase Interest OR = Deposit (Down payment) + Outstanding Balance (including HP interest paid by instalments

6. Calculation of Hire Purchase Interest (a) Straight line method (b) Actuarial Method (c) Sum-of-digits Method

7. 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

8. Example 1 An asset is acquired on the following terms: Cash price$9000 Down payment$1000 HP Price$12200 Nominal rate of interest10% Four annual instalments$2800

9. 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 YearHP interestCapitalInstalments $ $ $ 1 2 3 4 800 2800 2000 + = Answer:

10. B. Actuarial Method Interest is charged on the outstanding balance of the cash price after the down payment is made. 1.Equal instalments 2.Unequal instalment

11. 1 Equal instalment Example 2 An asset is acquired on the following terms: Cash price$9000 Down payment$1000 HP price$11096 Interest10% on outstanding balance Four annual instalment$2524 Equal instament = HP price – Down payment No. of instalment (11096-1000)/4

12. YearHP interest CapitalInstalments $ $ $ 1 2 3 4 (9000-1000)*10% =8002524 1724 (8000+800-2524)*10%=6281896 (6276+628-2524)*10%=4382086 (4380+438-2524)*10%=2302294 6276 4380 2096 8000 10096

13. Unequal instalment Example 3 An asset is acquired on the following terms: Cash price$9000 Down payment$1000 HP price$11000 Interest10% on outstanding balance Four annual instament$2000+interest Unequal instalment=Cash price-Down payment+Interest accrued No. of instalment (i.e.unpaid interest)

14. YearHP interest CapitalInstalments $ $ $ 1 2 3 4 (9000-1000)*10% =8002800 (8000+800-2800)*10%=600 (6000+600-2600)*10%=400 (4000+400-2400)*10%=200 6000 4000 2000 8000 10000 2000 2600 2400 2200

15. 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.

16. 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

17. Example 4 A motor vehicle was purchased under a hire purchase agreement Cash price$10000 Hire Purchase$13600 Instalments4 months Date of sale1 October 1996 Calculate the interest under each of the three cases: (a) First instalment due at the end of month from the date of sale (b) First instalment due at the beginning of month following the date of sale (c) First instalment due at the date of sale.

18. Case (a) and (b) Interest paid 1 st instalment $3600*4/10=$1440 2 nd instalment $3600*3/10=$1080 3 rd instalment $3600*2/10=$720 4 th instalment $3600*1/10=$360 Total HP interest =$13600-$10000=$3600 Sum of digit= 4*(4+1)/2=10

19. Case ( C ) Interest paid 1 st instalment $3600*3/6=$1800 2 nd instalment $3600*2/6=$1200 3 rd instalment $3600*1/6=$600 4 th instalment - Total HP interest =$13600-$10000=$3600 Sum of digit= 3*(3+1)/2=6

20. Concept Chart Hire Purchase BuyerSeller Assets account Hire purchase interest account Hire purchase creditors account Hire purchase interest suspense account Hire purchase sales Provision for unrealized profit Hire purchase debtors account

21. Purchaser’s Books

22. 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 system 2.Interest Suspense Method They differ mainly in the way they record hire purchase interest.

23. 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

24. Progress interest charge system Interest is charged upon each instalment.

25. 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 year ’ s 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:

26. 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

27. Balance Sheet Presentation For instance: after 1 st instalment Paid Progress interest charge system: Balance Sheet ( Instalment for 1 st year) Current Liabilities HP Creditor (Instalment for 2 nd year) $ X Long term Liabilities HP Creditor (Instalment for 3 rd year and so on) X Instalment for 2 nd year – Interest payable for 2 nd year Outstanding HP creditor – HP creditor on current liabilities

28. For instance: after 1 st instalment Paid Interest Suspense Method: Balance Sheet ( Instalment for 1 st year) Current Liabilities HP Creditor (Instalment for 2 nd year) $ X Long term Liabilities HP Creditor (Instalment for 3 rd year and so on) X Less HP interest suspense (X) X X Outstanding HP creditor – Instalment for next year Outstanding interest suspense – interest Payable for 2 nd year Interest payable for 2 nd year

29. Example Refer to textbook P.24

30. Example 6 ABC Ltd. purchased a vehicle from Grace Ltd. on 1 Jan 1996 on HP agreement. The details were as follows Cash price$9000 Down payment$1000 HP Price$11096 Nominal rate of interest10% on outstanding balance Four equal annual instalments First due31 Dec 1996 Depreciation10% on cost Using (a) the progress interest charge system and (b) interest suspense method, show transactions in books of ABC Ltd.

31. Total HP interest= HP price – Cash Price = 11096 – 9000 = 2096 Equal instalments = (11096 –1000)/4 =2524 Answer (a):

32. 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 Hire Purchase Interest 31/12/96 HP Creditor 800 31/12/96 P/L 800

33. Balance Sheet as at 31 Dec (Extract) Fixed Assets 96 Vehicle Less Pro for Dep Current Liabilities HP Creditor 9000 900 8100 1896 2524-628 Long Term Liabilities HP Creditor 4380 6276-1896

34. 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 6,276 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 Hire Purchase Interest 31/12/97 HP Creditor 628 31/12/97 P/L 628

35. Balance Sheet as at 31 Dec (Extract) Fixed Assets 96 Vehicle Less Pro for Dep Current Liabilities HP Creditor 9000 900 8100 97 9000 1800 7200 2086 Long Term Liabilities HP Creditor 1896 4380 2524-438 2294 4380-2086

36. 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 1/1/97 Balance b/d 6,276 31/12 Hp Interest 628 31/12 Bank-instalment 2,524 6,904 31/12 Balance 4,380 6,904 1/1/98 Balance b/d 4,380 31/12 HP interest(4380*10%) 438 31/12 Bank-instalment 2,524 31/12 Balance 2,294 4,818 Hire Purchase Interest 31/12/98 HP Creditor 438 31/12/98 P/L 438

37. Balance Sheet as at 31 Dec (Extract) Fixed Assets 96 Vehicle Less Pro for Dep Current Liabilities HP Creditor 9000 900 8100 1896 97 9000 98 1800 2700 7200 6300 2086 2294 Long Term Liabilities HP Creditor 4380 2294 2524-230 - 2294-2294

38. Hire purchase Creditor (Grace Ltd) 1/1/96 Vehicle 9,0001/1/96 Bank-deposit 1,000 31/12 HP Interest 80031/12 Bank-instalment 2,524 31/12 Balance c/d 6,276 9,800 1/1/97 Balance b/d 6,276 31/12 Hp Interest 628 31/12 Bank-instalment 2,524 6,904 31/12 Balance 4,380 6,904 1/1/98 Balance b/d 4,380 31/12 HP interest(4380*10%) 438 31/12 Bank-instalment 2,524 31/12 Balance 2,294 4,818 1/1/99 Balance b/d 2294 31/12 HP interest(2294*10%) 230 31/12 Bank-instalment 2,524 2524 Hire Purchase Interest 31/12/99 HP Creditor 230 31/12/99 P/L 230

39. Balance Sheet as at 31 Dec (Extract) Fixed Assets 96 Vehicle Less Pro for Dep Current Liabilities HP Creditor 9000 900 8100 1896 97 9000 9899 1800 2700 3600 7200 63005400 2086 2294 - Long Term Liabilities HP Creditor 4380 2294 --

40. 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

41. Dr Fixed assets Dr HP Interest Suspense Cr HP Creditor With the cash price of assets With total hire purchase interest With 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 accrued for the current year (at the year end) Dr Profit and Loss Cr HP Interest With the amount of hire purchase interest transferred to current year ’ s profit and loss account. Dr Profit and Loss Cr Provision for depreciation Annual depreciation charged based on full cash price of the asset. Interest Suspense Method:

42. Example Refer to textbook P.24

43. Example 6 ABC Ltd. purchased a vehicle from Grace Ltd. on 1 Jan 1996 on HP agreement. The details were as follows Cash price$9000 Down payment$1000 HP Price$11096 Nominal rate of interest10% on outstanding balance Four equal annual instalments First due31 Dec 1996 Depreciation10% on cost Using (a) the progress interest charge system and (b) interest suspense method, show transactions in books of ABC Ltd.

44. Answer (b): Total HP interest= HP price – Cash Price = 11096 – 9000 = 2096 Equal instalments = (11096 –1000)/4 =2524

45. Hire purchase Creditor (Grace Ltd) 1/1/96 Vehicle 9,0001/1/96 Bank-deposit 1,000 31/12 Bank-instalment 2,524 31/12 Balance c/d 7572 9,800 1/1/96 HP Interest Suspense 2096 (11096-9000) Hire Purchase Interest 31/12/96 HP suspense 800 31/12/96 P/L 800 HP Interest Suspense 31/12/96 HP Interest 800 (9000-1000)*10% 1/1/96 HP Creditor 2096 31/12/96 Bal c/d 1296 2096

46. Current Liabilities HP Creditor Balance Sheet as at 31 Dec (Extract) 96 Long Term Liabilities HP Creditor Less HP interest suspense 2524 628 1896 Less HP interest suspense 5048 668 4380 7572-2524 (7572-1296)*10% 1296-628

47. Hire purchase Creditor (Grace Ltd) 1/1/96 Vehicle 9,0001/1/96 Bank-deposit 1,000 31/12 Bank-instalment 2,524 31/12 Balance c/d 7572 9,800 1/1/97 Balance b/d 757231/12 Bank-instalment 2,524 6,904 31/12 Balance c/d 5048 6,904 1/1/96 HP Interest Suspense 2096

48. HP Interest Suspense 31/12/96 HP Interest 800 (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 Hire Purchase Interest 31/12/97 HP Creditor 628 31/12/98 P/L 628

49. Current Liabilities HP Creditor Balance Sheet as at 31 Dec (Extract) 9697 Long Term Liabilities HP Creditor Less HP interest suspense 2524 628 2524 438 1896 2086 Less HP interest suspense 5048 2524 668230 43802294 5048-2524 (5048-668)*10% 668-438

50. Hire purchase Creditor (Grace Ltd) 1/1/96 Vehicle 9,0001/1/96 Bank-deposit 1,000 31/12 Bank-instalment 2,524 31/12 Balance c/d 7572 9,8009,800 1/1/97 Balance b/d 757231/12 Bank-instalment 2,524 6,904 31/12 Balance c/d 5048 6,904 1/1/98 Balance b/d 504831/12 Bank-instalment 2,524 31/12 Balance c/d 2524 4,8184,818 1/1/96 HP Interest Suspense 2096

51. HP Interest Suspense 31/12/96 HP Interest 800 (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 Hire Purchase Interest 31/12/98 HP Creditor 438 31/12/98 P/L 438

52. Current Liabilities HP Creditor Balance Sheet as at 31 Dec (Extract) 969798 Long Term Liabilities HP Creditor Less HP interest suspense 2524 628 2524 438 230 1896 22942086 Less HP interest suspense 5048 2524 668230 - - 43802294 - 2524-2524 (2524-230)*10% 230-230

53. Hire purchase Creditor (Grace Ltd) 1/1/96 Vehicle 9,0001/1/96 Bank-deposit 1,000 31/12 Bank-instalment 2,524 31/12 Balance c/d 7572 9,800 1/1/97 Balance b/d 757231/12 Bank-instalment 2,524 6,904 31/12 Balance c/d 5048 6,904 1/1/98 Balance b/d 504831/12 Bank-instalment 2,524 31/12 Balance c/d 2524 4,818 1/1/99 Balance b/d 252431/12 Bank-instalment 2,524 2524 1/1/96 HP Interest Suspense 2096

54. HP Interest Suspense 31/12/96 HP Interest 800 (9000-1000)*10% 1/1/96 HP Creditor 2096 31/12/96 Bal c/d 1296 2096 31/12/97 HP Interest 628 (7572-1296)*10% 1/1/97 Bal b/d 1296 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 31/12/98 Bal c/d 230 31/12/98 HP Interest 230 (5048-668)*10% 1/1/99 Bal b/d 230 Hire Purchase Interest 31/12/99 HP Creditor 230 31/12/99 P/L 230

55. Current Liabilities HP Creditor Balance Sheet as at 31 Dec (Extract) 96979899 Long Term Liabilities HP Creditor Less HP interest suspense 2524 628 2524 - 438 230 - 1896 22942086 - Less HP interest suspense 5048 2524 668230 - - - - 43802294 - -

56. 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.

57. 1. Progress interest charge system Summary of procedures Dr HP creditor Cr Bank With the last payment to the HP creditor Dr HP interest Cr HP creditor With the HP interest and penalty charges for early termination of the hire purchase contract Dr Disposal Cr Asset With the cost of the asset Dr Provision for depreciation Cr Disposal Transferring related depreciation provision to the disposal account Dr Bank Cr Disposal With the insurance claim for the disposal (if any) Dr Profit and Loss Cr Disposal With the loss on the disposal (Reverse the entries for a profit on disposal)

58. Example 7

59. Cash Price$5000 Prov for dep$3200 ( A full year dep is charged in the year of purchase, but none in 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 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 settlement

60. HP Creditor 1996 $ May 31 Bank –instalment 1250 ($250*5) Jan 1 Bal b/f 1800 Dec 31 HP interest 300 ($50*6) June30 Bank-settlement 930 Dec 31 HP interest -penalty 80 2180 HP interest 1996 $ Dec 31 HP Creditor (300+80) 380 Dec 31 P/L 380

61. Disposal of Vehicle 1996 $ Jun 30 Vehicle 5000 Dep - Vehicle Vehicle 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 800 5000

62. 2. Interest suspense method Summary of procedures Dr HP Creditor Cr Bank With the last payment to the HP creditor Dr HP interest Cr HP interest suspense With the HP interest for the current year Dr HP Creditor Cr Disposal With any outstanding balance in the HP creditor account Dr Disposal Cr HP Interest suspense With any outstanding balance in the HP interest suspense account Dr Disposal Cr 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 Loss Cr Disposal With the loss on the disposal (Reverse the entries for a profit on disposal)

63. Example 8

64. Cash Price$5000 Prov for dep$3200 ( A full year dep is charged in the year of purchase, but none in 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 settlement

65. HP Creditor 1996 $ May 31 Bank –instalment 1250 ($250*5) Jan 1 Bal b/f 2250 June30 Bank-settlement 930 2250 HP interest 1996 $ Dec 31 HP Creditor 300 Dec 31 P/L 300 Jun 30 Disposal 70 HP interest suspense 1996 $ Jan 1 Bal/f 450 Jun 30 HP interest(60*5) 300 Jun 30 Disposal 150 450 450

66. Disposal of Vehicle 1996 $ Jun 30 Vehicle 5000 Dep - Vehicle Vehicle 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 880 5000 Jun 30 HP Creditor 70 Jun 30 HP interest Suspense 150 Include the penalty charge $80 For early termination of HP

67. Seller’s Book

68. 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

69. Hire Purchase Profit HP profit= HP price – Cash selling Price Gross profit=Cash price-Cost of good sold Total Profit=HP profit+Gross profit

70. Interest Suspense Method The characteristics of the interest suspense method 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.

71. Summary of procedures Dr HP debtors Dr HP Sales With the cash selling price of the sale. Dr HP debtor Cr HP interest suspense With the total HP interest Dr Bank Cr HP debtors With the deposit and installments received Dr HP interest suspense Cr HP interest / P&L(income) With the hire purchase interest receivable for the current period Dr HP Sales Cr HP Trading Transfer the HP sales to HP trading account

72. Example 9

73. 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 volume2 units Date of sale1 Jan 1996 Cash price$1200 HP price$2000 Cost$1000 Down paymentNIL Instalments$250*8 quarterly First due31 Mar 1996

74. HP Debtors 1996 $ Jan 1 HP Sales ($1200*2) 2400 Jan 1 Interest suspense 1600 (2000-1200)*2 Dec 31 Bank-instalment ($250*4*2) 2000 Dec 31 Bal c/d 2000 4000 4000 HP Sales 1996 $ Dec 31 HP Trading 2400 Jan 1 HP Debtors 2400 HP interest suspense 1996 $ Dec 31 HP interest received (2000-1200)*4/8*2 800 Jan 1 HP Debtors 1600 Dec 31 Bal c/d 800 1600 Cash price HP interest received 1996 $ Dec 31 P/L 800 Jan 1 HP int suspense 800

75. Trading and profit and loss account for the year ended (Extract) Sales (cash price) $ 96 2400 Less: cost of goods sold2000 400 HP Gross profit Add: HP interest received 800 Balance Sheet as at 31 Dec (Extract) $ 96 Current Assets HP Debtors Less Interest suspense 2000 800 1200

76. HP Debtors 1996 $ Jan 1 HP Sales ($1200*2) 2400 Jan 1 Interest suspense 1600 (2000-1200)*2 Dec 31 Bank-instalment ($250*4*2) 2000 Dec 31 Bal c/d 2000 4000 1997 Jan 1 Bal b/d 2000Dec 31 Bank- instalment 2000

77. HP interest suspense 1996 $ Dec 31 HP interest received (2000-1200)*4/8*2 800 Jan 1 HP Debtors 1600 Dec 31 Bal c/d 800 1600 1997 Dec 31 HP interest 800 received (2000-1200)*4/8*2 Jan 1 Bal b/d 800 Interest received 1996 $ Dec 31 HP interest suspense 800 Dec 31 P/L 800

78. Trading and profit and loss account for the year ended (Extract) Sales (cash price) $ 96 97 $ 2400 Less: cost of goods sold2000 400 HP Gross profit Add: HP interest received 800 ------ Balance Sheet as at 31 Dec (Extract) $ $ 96 97 Current Assets HP Debtors Less Interest suspense 2000 800 1200 ------

79. 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.

80. Summary of procedures: Dr HP Debtors Dr HP Sales With the hire purchase price. Dr Bank Cr HP Debtors With the deposit and instalments received Dr HP Sales Cr HP Trading Transfer the HP Sales to HP Trading a/c Dr HP Trading Cr 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 profit Cr HP trading With the decrease in the provision for unrealized profit. * Transfer the unearned total profit (unearned HP profit & unearned GP)

81. Provision for unrealized profit = Total Profit * instalments not yet received HP price = (HP price – Cost) * Instalments not yet received HP price

82. Example 10

83. 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 volume2 units Date of sale1 Jan 1996 Cash price$1200 HP price$2000 Cost$1000 Down paymentNIL Instalments$250*8 quarterly First due31 Mar 1996

84. 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

85. HP Debtors 1996 $ Jan 1 HP Sales ($2000*2) 4000 Dec 31 Bank-instalment ($250*4*2) 2000 Dec 31 Bal c/d 2000 4000 HP Price (a) Provision for unrealized profit 1996 $ Dec 31 Bal c/d 1000 ($4000-2000)*2000/4000 Dec 31 HP Trading 1000

86. Trading and profit and loss account for the year ended (Extract) Sales (HP price) $ 96 4000 Less: cost of goods sold2000 1000 Gross profit Balance Sheet as at 31 Dec (Extract) 96 Current Assets HP Debtors Less Provision for unreaslised profit 2000 1000 Less:Provision for unrealised profit 1000

87. HP Debtors 1996 $ Jan 1 HP Sales ($2000*2) 4000 Dec 31 Bank-instalment ($250*4*2) 2000 Dec 31 Bal c/d 2000 4000 1997 Jan 1 Bal b/d 2000Dec 31 Bank- instalment 2000 HP Price (a) Provision for unrealized profit 1996 $ Dec 31 Bal c/d 1000 ($4000-2000)*2000/4000 Dec 31 HP Trading 1000 1997 $ Dec 31 HP Trading 1000 Dec 31 Bal b/d 1000 Dec 31 Bal c/d 0 ($4000-2000)*0/4000 1000

88. Trading and profit and loss account for the year ended (Extract) Sales (HP price) $ 96 97 $ 4000 Less: cost of goods sold 2000 Gross profit - Balance Sheet as at 31 Dec (Extract) $ $ 96 97 Current Assets HP Debtors Less Provision for unrealized profit 2000 1000 ------ Less:Increase Provision for unrealized profit 1000 Add: Decrease in prov.for unrealized profit 1000

89. HP Debtors 1996 $ Jan 1 HP Sales ($2000*2) 4000 Dec 31 Bank-instalment ($250*4*2-250) 1750 Dec 31 Bal c/d 2250 4000 HP Price (b) Provision for unrealized profit 1996 $ Dec 31 Bal c/d 1125 ($4000-2000)*2250/4000 Dec 31 HP Trading 1125

90. Trading and profit and loss account for the year ended (Extract) Sales (HP price) $ 96 4000 Less: cost of goods sold2000 875 Gross profit Balance Sheet as at 31 Dec (Extract) 96 Current Assets HP Debtors Less Provision for unrealized profit 2250 1125 Less:Provision for unrealized profit 1125

91. HP Debtors 1996 $ Jan 1 HP Sales ($2000*2) 4000 Dec 31 Bank-instalment ($250*4*2-250) 1750 Dec 31 Bal c/d 2250 4000 1997 Jan 1 Bal b/d 2250Dec 31 Bank- instalment 2250 HP Price (b) Provision for unrealized profit 1996 $ Dec 31 Bal c/d 1125 ($4000-2000)*2250/4000 Dec 31 HP Trading 1125 1997 $ Dec 31 HP Trading 1125 Dec 31 Bal b/d 1125 Dec 31 Bal c/d 0 ($4000-2000)*0/4000 1125

92. Trading and profit and loss account for the year ended (Extract) Sales (HP price) $ 96 97 $ 4000 Less: cost of goods sold 2000 Gross profit - Balance Sheet as at 31 Dec (Extract) $ $ 96 97 Current Assets HP Debtors Less Provision for unreaslised profit 2250 1125 ------ Less:IncreaseProvision for unrealised profit 1125 Add: Decrease in prov.for unreasised profit 8751125

93. C. A combination of the 2 methods The 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

94. Summary of procedures 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 current period Dr HP trading Cr 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)

95. Provision for unrealised profit = (Cash price – Cost ) * Instalments not yet received Cash Price

96. Example 11

97. 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 volume2 units Date of sale1 Jan 1996 Cash price$1200 HP price$2000 Cost$1000 Down paymentNIL Instalments$250*8 quarterly First due31 Mar 1996

98. Interest per instalment = ($2000-1200) 8 = $100 Instalment = Capital + Interest $250 = $150 + $100

99. HP Debtors 1996 $ Jan 1 HP Sales ($1200*2) 2400 Dec 31 Bank-instalment ($250-100)*4*2 1200 Dec 31 Bal c/d 1200 4000 CashPrice HP Interest Receivable 1996 $ Dec 31 P/L 800Dec 31 Bank ($100*4*2) 800 Provision for unrealized profit 1996 $ Dec 31 Bal c/d 200 ($2400-2000)*1200/2400 Dec 31 HP Trading 200

100. Trading and profit and loss account for the year ended (Extract) Sales (cash price) $ 96 2400 Less: cost of goods sold2000 200 HP profit Balance Sheet as at 31 Dec (Extract) 96 Current Assets HP Debtors 1200 Less:Provision for unrealised profit 200 Add: Interest received 800

101. HP Debtors 1996 $ Jan 1 HP Sales ($1200*2) 2400 Dec 31 Bank-instalment ($250-100)*4*2 1200 Dec 31 Bal c/d 1200 4000 CashPrice HP Interest Receivable 1997 $ Dec 31 P/L 800Dec 31 Bank ($100*4*2) 800 1997 Jan 1 Bal b/d 1200Dec 31 Bank- instalment 1200

102. Provision for unrealized profit 1996 $ Dec 31 Bal c/d 200 ($2400-2000)*1200/2400 Dec 31 HP Trading 200 1997 $ Dec 31 Bal b/d 200 Dec 31 HP Trading 200 Dec 31 Bal c/d 0 ($2400-2000)*0/2400 200

103. Trading and profit and loss account for the year ended (Extract) Sales (cash price) $ 96 97 $ 2400 Less: cost of goods sold 2000 Gross profit - Balance Sheet as at 31 Dec (Extract) $ $ 96 97 Current Assets HP Debtors 1200 - Less:IncreaseProvision for unrealised profit 200 Add: Decrease in prov.for unreasised profit 200 Add: Interest Received 800800

104. Repossession

105. 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.

106. Dr Repossession Cr HP Creditor With the outstanding balance for the particular HP debtors Interest suspense method Dr HP interest suspense Cr Repossession Profit suspense method Dr Provision for unrealized profit Cr Repossession The combined method Dr Repossession Cr interest Receivable With the HP interest not yet received With the outstanding provision transferred With the amount of accrued HP interest Dr Trading Cr Repossession With the value of the repossessed item which is taken back into stock Dr Bank Cr Repossession With the insurance claim or any sale proceeds for the repossessed item. Dr Profit and loss Cr Repossession With the loss on the repossession (Reverse the entries for a profit on repossession)

107. The value of the repossessed item Cost * Outstanding balance of the particular HP HP price debtor ( repossessed items) =

108. (a) Using interest suspense method

109. 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 volume2 units Date of sale1 Jan 1996 Cash price$1200 HP price$2000 Cost$1000 Down paymentNIL Instalments$250*8 quarterly First due31 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

110. HP Debtors 1997 $ 2000 Jan 1 Bal b/d 2000 Dec 31 Bank- instalment 1000 Mar 31 Repossession 1000 HP interest suspense 1997 $ 800 Dec 31 HP interest 400 received (2000-1200)*4/8*1 Jan 1 Bal b/d 800 Mar 31 Repossession 400 Repossession 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

111. (b) Using profit suspense method

112. 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 volume2 units Date of sale1 Jan 1996 Cash price$1200 HP price$2000 Cost$1000 Down paymentNIL Instalments$250*8 quarterly First due31 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.

113. HP Debtors 1997 $ Jan 1 Bal b/d 2000 Dec 31 Bank- instalment 1000 Mar 31 Repossession 1000 Repossession 1997 $ Mar 31 HP Debtors 1000Mar 31 Prov. for unrealised 500 profit (2000-1000)*1000/2000 Dec 31 HP Trading 500 ($1000*1000/2000) 1000 Provision for unrealised profit 1997 $ 800 800 Dec 31 HP Trading 500 Jan 1 Bal b/d 1000 Mar 31 Repossession 500 Value of Repossessed items Dec 31 Bal c/d 0 (2000-1000)*0/2000 2000

114. (c) Using the combined method

115. 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 volume2 units Date of sale1 Jan 1996 Cash price$1200 HP price$2000 Cost$1000 Down paymentNIL Instalments$250*8 quarterly First due31 Mar 1996

116. 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

117. (1) HP Debtors 1997 $ 1200 Jan 1 Bal b/d 1200 Dec 31 Bank- instalment 600 ($250-100)*4 Mar 31 Repossession 600 Interest receivable 1997 $ Dec 31 Bank ($100*4) 400 Dec 31 P/L 400 Repossession 1997 $ Mar 31 HP Debtors 600 $1200-(250-100)*4 Dec 31 HP Trading 500 ($1000*1000/1200) Value of Repossessed items Dec 31 P/L-loss on repossession 100 600

118. (2) 1997 $ 1200 Jan 1 Bal b/d 1200 Dec 31 Bank- instalment 600 ($250-100)*4 June30 Repossession 600 Interest receivable 1997 $ Dec 31 Bank ($100*4) 400 Dec 31 P/L 600 Repossession 1997 $ June 30 HP Debtors 600 $1200-(250-100)*4 Dec 31 HP Trading 500 ($1000*1000/1200) Value of Repossessed items Dec 31 P/L-loss on repossession 300 600 HP Debtors June 30 Repossession 200 ($100*2) June 30 Interest 200 receivable 600

119. Hire Purchase Trading and Profit and loss account

120. x x x x x x x Hire Purchase Trading $$ Purchase Add Repossession Less closing stock Cost of Goods sold Gross profit Sales – cash price x x Interest suspense method and the combined method

121. x x Profit and Loss (Extract) $$ Loss on Repossession HP interest Profit on Repossession HP profit x x

122. x x x x x x x Hire Purchase Trading $$ Purchase Add Repossession Less closing stock Cost of Goods sold Gross profit Sales – HP price x x Provision for Unrealized profit x Profit suspense method

123. x x Profit and Loss (Extract) $$ Loss on Repossession Profit on Repossession HP profit x

124. 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 $1,000 Instalment 4 equal annual instalments First due 31 December 1996 Interest 10% on outstanding balance Depreciation 10% on cost Using (a) the progress interest charge system and (b) interest suspense method