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
Outstanding Balance (including HP interest paid by instalments = Deposit (Down payment) +

Calculation of Hire Purchase Interest
Straight line method Actuarial Method 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

Answer: 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 $ $ $ 1 2 3 4 = 2800 2000 800

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

1 Equal instalment Example 2
Equal instament = HP price – Down payment No. of 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 ( )/4

Year HP interest Capital Instalments $ $ $ 1 2 3 4
$ $ $ 1 2 3 4 6276 ( )*10% =800 1724 2524 ( )*10%=628 1896 ( )*10%=438 2086 ( )*10%=230 2294 8000 10096 4380 2096

Unequal instalment Example 3
Unequal instalment=Cash price-Down payment+Interest accrued No. of instalment (i.e.unpaid interest) 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

Year HP interest Capital Instalments $ $ $ 1 2 3 4
$ $ $ 1 2 3 4 6000 ( )*10% =800 2800 2000 ( )*10%=600 2600 2400 ( )*10%=400 2200 ( )*10%=200 8000 10000 4000 2000

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.

When n = number of instalments
Sum of digits = n(n+1) 2 HP interest per instalment = Total HP interest* Digit assigned in the instalment Sum-of-digits of total instalment

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 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.

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

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

Concept Chart Hire Purchase Buyer Seller Assets account Hire purchase
interest account creditors account interest suspense sales Provision for unrealized profit debtors 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. Progress interest charge system Interest Suspense Method They differ mainly in the way they record hire purchase interest.

* 3 method of HP Interest Apportionment Straight-line method
Treatment Progress interest charge system Interest suspense method * 3 method of HP Interest Apportionment Straight-line method Actuarial method Sum-of-digit method = 6 Version

Progress interest charge system
Interest is charged upon each instalment.

Progress interest charge system:
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 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

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 Liabilities HP Creditor (Instalment for 2nd year) $ X Instalment for 2nd year – Interest payable for 2nd year Long term Liabilities HP Creditor (Instalment for 3rd year and so on) X Outstanding HP creditor – HP creditor on current liabilities

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

Example Refer to textbook P.24

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 interest 10% on outstanding balance Four equal annual instalments First due 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 (a): Total HP interest= HP price – Cash Price = 11096 – 9000
= 2096 Equal instalments = (11096 –1000)/4 =2524

Hire purchase Creditor (Grace Ltd)
1/1/96 Bank-deposit ,000 1/1/96 Vehicle ,000 31/12 Bank-instalment ,524 31/12 HP Interest ( )*10% 31/12 Balance c/d ,276 9,800 9,800 Hire Purchase Interest 31/12/96 HP Creditor 31/12/96 P/L

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

1/1/96 Bank-deposit ,000 1/1/96 Vehicle ,000 31/12 Bank-instalment ,524 31/12 HP Interest 31/12 Balance c/d ,276 9,800 9,800 31/12 Bank-instalment ,524 1/1/97 Balance b/d ,276 31/12 HP Interest (6276*10%) 31/12 Balance ,380 6,904 6,904 Hire Purchase Interest 31/12/97 HP Creditor 31/12/97 P/L

97 96 Fixed Assets 9000 Vehicle Less Pro for Dep Current Liabilities HP Creditor 9000 900 1800 8100 7200 1896 2086 Long Term Liabilities HP Creditor 4380 2294

1/1/96 Bank-deposit ,000 1/1/96 Vehicle ,000 31/12 Bank-instalment ,524 31/12 HP Interest 31/12 Balance c/d ,276 9,800 9,800 31/12 Bank-instalment ,524 1/1/97 Balance b/d ,276 31/12 Hp Interest 31/12 Balance ,380 6,904 6,904 31/12 Bank-instalment ,524 1/1/98 Balance b/d ,380 31/12 Balance ,294 31/12 HP interest(4380*10%) 4,818 4,818 Hire Purchase Interest 31/12/98 HP Creditor 31/12/98 P/L

97 98 96 Fixed Assets 9000 Vehicle Less Pro for Dep Current Liabilities HP Creditor 9000 9000 900 1800 2700 8100 7200 6300 1896 2086 2294 Long Term Liabilities HP Creditor 4380 2294 -

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

97 98 99 96 Fixed Assets 9000 Vehicle Less Pro for Dep Current Liabilities HP Creditor 9000 9000 9000 900 1800 2700 3600 8100 7200 6300 5400 - 1896 2086 2294 Long Term Liabilities HP Creditor - - 4380 2294

Interest Suspense Method
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 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. Cr Provision for depreciation Annual depreciation charged based on full cash price of the asset.

Example Refer to textbook P.24

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 interest 10% on outstanding balance Four equal annual instalments First due 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 = – 9000 = 2096 Equal instalments = (11096 –1000)/4 =2524

1/1/96 Bank-deposit ,000 1/1/96 Vehicle ,000 31/12 Bank-instalment ,524 1/1/96 HP Interest Suspense ( ) 31/12 Balance c/d 9,800 9,800 HP Interest Suspense 31/12/96 HP Interest ( )*10% 1/1/96 HP Creditor 31/12/96 Bal c/d Hire Purchase Interest 31/12/96 HP suspense 31/12/96 P/L

96 Current Liabilities HP Creditor 2524 Less HP interest suspense 628 1896 ( )*10% Long Term Liabilities HP Creditor 5048 668 Less HP interest suspense 4380

1/1/96 Bank-deposit ,000 1/1/96 Vehicle ,000 31/12 Bank-instalment ,524 1/1/96 HP Interest Suspense 31/12 Balance c/d 9,800 9,800 31/12 Bank-instalment ,524 1/1/97 Balance b/d 31/12 Balance c/d 6,904 6,904

Hire Purchase Interest
HP Interest Suspense 31/12/96 HP Interest ( )*10% 1/1/96 HP Creditor 31/12/96 Bal c/d 31/12/97 HP Interest ( )*10% 1/1/97 Bal b/d 31/12/97 Bal c/d Hire Purchase Interest 31/12/97 HP Creditor 31/12/98 P/L

96 97 Current Liabilities HP Creditor 2524 2524 Less HP interest suspense 628 438 1896 2086 ( )*10% Long Term Liabilities HP Creditor 5048 2524 668 230 Less HP interest suspense 4380 2294

1/1/96 Bank-deposit ,000 1/1/96 Vehicle ,000 31/12 Bank-instalment ,524 1/1/96 HP Interest Suspense 31/12 Balance c/d 9,800 9,800 31/12 Bank-instalment ,524 1/1/97 Balance b/d 31/12 Balance c/d 6,904 6,904 31/12 Bank-instalment ,524 1/1/98 Balance b/d 31/12 Balance c/d 4,818 4,818

HP Interest Suspense 31/12/96 HP Interest ( )*10% 1/1/96 HP Creditor 31/12/96 Bal c/d 31/12/97 HP Interest ( )*10% 1/1/97 Bal b/d 31/12/97 Bal c/d 31/12/98 HP Interest ( )*10% 1/1/98 Bal b/d 31/12/98 Bal c/d Hire Purchase Interest 31/12/98 HP Creditor 31/12/98 P/L

96 97 98 Current Liabilities HP Creditor 2524 2524 2524 230 Less HP interest suspense 628 438 1896 2086 2294 ( )*10% Long Term Liabilities HP Creditor 2524 - 5048 - 668 230 Less HP interest suspense 4380 2294 -

1/1/96 Bank-deposit ,000 1/1/96 Vehicle ,000 31/12 Bank-instalment ,524 1/1/96 HP Interest Suspense 31/12 Balance c/d 9,800 9,800 31/12 Bank-instalment ,524 1/1/97 Balance b/d 31/12 Balance c/d 6,904 6,904 31/12 Bank-instalment ,524 1/1/98 Balance b/d 31/12 Balance c/d 4,818 4,818 31/12 Bank-instalment ,524 1/1/99 Balance b/d 2524 2524

HP Interest Suspense 31/12/96 HP Interest ( )*10% 1/1/96 HP Creditor 31/12/96 Bal c/d 31/12/97 HP Interest ( )*10% 1/1/97 Bal b/d 31/12/97 Bal c/d 31/12/98 HP Interest ( )*10% 1/1/98 Bal b/d 31/12/98 Bal c/d 31/12/98 HP Interest ( )*10% 1/1/99 Bal b/d Hire Purchase Interest 31/12/99 HP Creditor 31/12/99 P/L

96 97 98 99 Current Liabilities HP Creditor 2524 2524 2524 - 230 Less HP interest suspense 628 438 - 1896 - 2086 2294 Long Term Liabilities HP Creditor - - 5048 2524 - 668 230 - Less HP interest suspense 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.

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 With the insurance claim for the disposal (if any) Dr Profit and Loss 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 in the year of disposal) HP creditor on 1 Jan $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

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

Disposal of Vehicle $ $ Jun 30 Vehicle Jun 30 Dep Jun 30 Bank - insurance Dec 31 P/L - loss Dep - Vehicle $ $ Jun 30 Disposal Jan 1 B/f Vehicle $ $ Jun 30 Disposal Jan b/f

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 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 Cr Asset With the cost of the asset Dr Prov. for Depn. Transferring the related depreciation provision to the disposal account Dr Bank With the insurance claim for the disposal (if any) Dr Profit and Loss 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 in the year of disposal) HP creditor on 1 Jan $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

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

Disposal of Vehicle 1996 $ 1996 $ Jun 30 Vehicle 5000 Jun 30 Dep 3200
$ $ Jun 30 Vehicle Jun 30 Dep Jun 30 HP interest Suspense Jun 30 Bank - insurance Jun 30 HP Creditor Dec 31 P/L - loss Include the penalty charge $80 For early termination of HP Dep - Vehicle $ $ Jun 30 Disposal Jan 1 B/f Vehicle $ $ Jun 30 Disposal Jan b/f

Seller’s Book

* 3 method of HP Interest Apportionment Straight-line method
Treatment Profit Suspense Method (ii) HP Interest Suspense Method * 3 method of HP Interest Apportionment Straight-line method Actuarial method 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: The hire purchase sale is recorded at the cash price Profit is recognized immediately in the year of sale. The gross profit and interest income are accounted for separately. Interest income is allocated over the period of the hire purchase agreement on a suitable basis. Only the amount of hire purchase interest receivable in the current period is taken into account.

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 Cr HP Trading Transfer the HP sales to HP trading account

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 Mar 1996

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

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

HP Debtors $ $ Jan 1 HP Sales ($1200*2) Dec 31 Bank-instalment ($250*4*2) Jan 1 Interest suspense 1600 ( )*2 Dec 31 Bal c/d Jan 1 Bal b/d Dec 31 Bank- instalment

HP interest suspense $ $ Jan 1 HP Debtors Dec 31 HP interest received ( )*4/8* Dec 31 Bal c/d Dec 31 HP interest received ( )*4/8*2 Jan 1 Bal b/d Interest received $ $ Dec 31 P/L Dec 31 HP interest suspense 800

96 97 $ $ $ $ Sales (cash price) 2400 - Less: cost of goods sold 2000 HP Gross profit 400 Add: HP interest received 800 800 Balance Sheet as at 31 Dec (Extract) 96 97 $ $ Current Assets HP Debtors Less Interest suspense - 2000 800 1200

B. Profit suspense method
The profit suspense method has the following characteristics: The hire purchase sale is recorded at the hire purchase price. The profit is recognized in proportion of the amount collected. The gross profit and the interest income are not accounted for separately.

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 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)

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

Example 10

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 Mar 1996

Required: Account prepared according to the following assumptions: 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

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

96 $ $ Sales (HP price) 4000 Less: cost of goods sold 2000 Less:Provision for unrealised profit 1000 1000 Gross profit Balance Sheet as at 31 Dec (Extract) 96 Current Assets HP Debtors Less Provision for unreaslised profit 2000 1000 1000

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

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

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

96 $ $ Sales (HP price) 4000 Less: cost of goods sold 2000 Less:Provision for unrealized profit 1125 875 Gross profit Balance Sheet as at 31 Dec (Extract) 96 Current Assets HP Debtors Less Provision for unrealized profit 2250 1125 1125

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

96 97 $ $ $ $ Sales (HP price) 4000 - Add: Decrease in prov.for unreasised profit 1125 2000 Less: cost of goods sold Less:IncreaseProvision for unrealised profit 1125 Gross profit 875 1125 Balance Sheet as at 31 Dec (Extract) 96 97 $ $ Current Assets HP Debtors Less Provision for unreaslised profit - 2250 1125 1125

C. A combination of the 2 methods
The combination of 2 methods has the following characteristics: The hire purchase sale is recorded at the cash price. The profit is recognized in proportion of the amount collected. The gross profit and the interest income are accounted for separately. Interest income is allocated over the period of the hire purchase agreement on a suitable basis

Summary of procedures Dr HP debtors Dr HP Sales With the cash price.
Dr Bank Cr HP debtor With the deposit received 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)

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

Example 11

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 Mar 1996

Interest per instalment
= ($ ) 8 = $100 Instalment = Capital Interest $ = $ $100

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

96 $ $ Sales (cash price) 2400 Less: cost of goods sold 2000 Less:Provision for unrealised profit 200 200 HP profit Add: Interest received Balance Sheet as at 31 Dec (Extract) 96 Current Assets HP Debtors 1200

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

Provision for unrealized profit
$ $ Dec 31 Bal c/d ($ )*1200/2400 Dec 31 HP Trading $ $ Dec 31 Bal b/d Dec 31 HP Trading Dec 31 Bal c/d ($ )*0/2400

96 97 $ $ $ $ Sales (cash price) 2400 - Add: Decrease in prov.for unreasised profit 200 2000 Less: cost of goods sold Less:IncreaseProvision for unrealised profit 200 Gross profit 200 200 Add: Interest Received 800 Balance Sheet as at 31 Dec (Extract) 96 97 $ $ Current Assets HP Debtors - 1200

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. 2.42.

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 The combined method Cr interest Receivable With the HP interest not yet received With the outstanding provision transferred With the amount of accrued HP interest Dr Trading With the value of the repossessed item which is taken back into stock Dr Bank With the insurance claim or any sale proceeds for the repossessed item. Dr Profit and loss 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 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 The repossessed item has been taken back into stock

Dec 31 P/L-loss on repossession 100 1000 1000
HP Debtors $ $ Jan 1 Bal b/d Mar 31 Repossession Dec 31 Bank- instalment HP interest suspense $ $ Jan 1 Bal b/d Mar 31 Repossession Dec 31 HP interest received ( )*4/8*1 Value of Repossessed items Repossession $ $ Mar 31 HP Debtors Mar 31 HP int. suspense 400 ($800-$400) Dec 31 HP Trading ($1000*1000/2000) Dec 31 P/L-loss on repossession 100

(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 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 The repossessed item has been taken back into stock.

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

(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 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 The seller repossessed the goods on the same date (31 Mar 1997)as that the HP debtor defaulted on the payment The seller repossessed the goods on 31 June 1997, after the HP debtor defaulted on the payment

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

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

Hire Purchase Trading and Profit and loss account

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

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

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

Profit and Loss (Extract)
$ Loss on Repossession Profit on Repossession HP profit

ABC Ltd. Purchased a vehicle from Grace ltd
ABC Ltd. Purchased a vehicle from Grace ltd. On Jan on hire purchase agreement. The details were as follows: Cash price $9,000 HP price $11,096 Down payment $1,000 Instalment equal annual instalments First due December 1996 Interest % on outstanding balance Depreciation % on cost Using (a) the progress interest charge system and (b) interest suspense method

Hire Purchase Accounts

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Hire Purchase Accounts

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About project

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