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IJNIT 4 HIRE^ PURCHASE^ ACCOUNTS^ I
Structure
Objective< Introduction Nature of Hire Purchase Agreement Legal Position 4.3.1 Definition 4.3.2 Characteristics of Hire Purchase Agreement 4.3.3 Rights of Hirers Ascertaining the InterestICash Price 4.4.1 Ascertainment of Interest 4.4.2 Ascertainment of Total Cash Price Accounting Records in the Books of the Purchaser 4.5.1 When the Asset is Recorded at Full Cash Price 4.5.2 When the Asset is Recorded at Cash Price Actually Paid Accounting Records in the Books of Vendor Let Us Sum Up Key Words Answers to Check Your ~ r o g ; e s s Terminal Questions and Exercises
4.0 OBJECTIVES
After studying this unit you should be able to : @ explain what a hire purchase agreement is, @ describe the legal position oT a hire purchase agreement, 6 calculate interest and cash price in relati~nto a hire purchase agreement, 6 pass the basic accounting entries in the books of both purchaser and vendor.
4.1 INTRODUCTION
When the goods are sold the purchaser may either make the full payment at one time or may defer the payment. When the payment is deferred, the amount niay be paid in monthly, quarterly or yeaily instalrhents. When the price of an article is paid by instalments, the total amount paid is higher than the actual cash price of the article. The excess price is the charge for interest and the risk involved. This arrangement of making the payment in instalments is beneficial to both the seller and the bu);er. The seller is able to sell more goods and the buyer can buy expensive items with his limited resources. There are two systems of deferred payments, namely, (i) Hire Purchase System, and (ii) Instalment Payment System. In this unit we will learn in detail about the Hire Purchase System.
4.2 NATURE OF HIRE PURCHASE AGREEMENT
A hire purchase agreement is one under which the buyer takes delivery of goods, promising to pay the price in'certain number of instalments and until full payment is made, to treat the payment as hire charges for using the said goods. In fact, a hire purchase agreement stipulates that (i) the delivery of goods will be given by the owner of goods to the hire purchaser, (ii) payment will be made in instalments, (iii) each instalment will be4reated as hire charge so that if default in respect of payment of even the last instalment is made, the seller will be entitled to take away the goods without compensating, the hire purchaser in any form, and (iv) if all instalments are paid and the other conditions are fulfilled, the ownership of the goods will pass to the buyer.. Therefore in caseof hire purchase, the seller i.e., the hire vendor gives only the possession: of the goods and retains the ownership with him until the last instalment is paid. In other words, the hire purchascl. is c~olythe user of.the goods and not the
Hire Purchase Accounts, (^) owner. In case he.fails to pay any of the instalments the vendor will take his goods back. Apart from that the vendor will not pay back the amount received .from the purchaser. Such an amount will be treated as hire charge for the goods. Therefore till the last instalment is paid the hire purchaser h'as got an option, whether to purchase that particular article or not.
4.3.2 Characteristics of Hire purchase Agreement Following are the characteristics of the hire purchase agreement.
i) 11 must be i n writing and must'he signed by all the parties thereto (Section 3).
ii) According to'section 4 of Hire Purchases Act, 1972', the agreement must state
a) the hire purchase price of the goods to which the a g reement relates;
b) the,cash price of the goods, that is to say, the price at which the goods may be purchased b'y the hirer for cash;. , c) the date on which the agreement shall be deemed to have commenced; .d) the number'of instalments by which the hire purchase price is to be paid, the amount of each of those instalments and the date (the mode of determining the date upon which it is payable) and the person to whom and the p l a c e ~ h e s e it is payable;' and e) the goods to which the agreement relates, in a manner sufficient to identify them.
. As mentioned earlier, the p&ment madkby the'hire purchaser under this system is always more than what he pay if he decldedto go in for cash purchase. The reason is that, apart from the cash price, the hire purchase, -- - price includes i) interest^ for payment being made over a period of time, ii) the payment fol the risk taken by the seller, iii) expenditure on the registration, insurance and delivery of goods, etc.
4.3 LEGAL POSITION
' 4.3.1 Dennition
According to Section 2(c) of the Hire Purchase Act, 1972 the hire purchase agreement is an agreement under which the goods are let on hire and the hirer has an option to purchase them in accordance with the terms of the agreement and includes an agreement under which i) possession^ ~f^ goods is delivered^ by^ the owner thereof to^ a^ person on condition that such person pays the agreed amount in periodical i,%!(ialments, ii) the property in the goods is to pass to such person on the payment of the last of such instalments,' and iii) such person has a right to terminate the agreement at any time before the property so passes.
Apart from the above mentioned conditions, a.full description of the amount to be - paid in,cash or by cheque, if any, should be given in the agreement.
4.3.3 Rights of Hirers As per the Hire Purchase Agreement the hirer has got the right to return the goods. to the vendor. Apart from this, the Hire Purchase Act gives the following rights to the hirer.
- The owner (or the vendor) cannot terminate the hire,purchase agreement for default in payment of hire or due to an unauthorised act or breach of expressed
conditions unless a notice in this regard in writing is given to the hirer. The notice
period is (i) one week where the hire is payable at weekly or less than that,
interval, and (ii) two weeks in other cases.
2) In the followihg cases, the right to repossess the goods will not exist unless it is
sanctioned by the court.
i) Where thc hire-purchases price is less than Rs. 15,000 and one half of the hire
'purchase price has been paid. (^6) ii) Where the hire purchase price is'higher, three - quarters of the hire purchases
, -6 price has been paid. However,^ the^ right of repossession will^ lapse^ in^ case^ of ,.
Hire Purchnse Accounts (^) different manner in the books of account. It is, therefore, necessary*toseparate the hire purchase price into cash price and interest. However, it may be noted that .the Cash Down Payment made immediately after signing the agreement will not include the element of interest. Another point t o be kept in mind is that the interest element in each instalment is not same. It keeps on reducing with every instalment. This is so because the interest is charged on the balance of the principal amount due and not on the full amount. For proper allocation therefore we must know the cash price, the hire purchase price and the amount of interest.. - - 4.4.1 Ascertainment of Interest While calculating interest we may .be faced with the following two siluations. a) When rate of interest, total cash price and instalrnents are given b) When total cash price and instalments are given but the rate of interest is not given. In both the above mentioned cases, the interest has to be calculated. Let us now take them one by one. , a) When Rate of Interest, Total Cash Price and Instalments are given. In this situation, before calculating the element of interest included in each instalment, it will be helpful t o ascertain the total amount of interest involved. This will b e ascertained by subtracting the Total Cash Price from the hire purchase price. Then the following steps should be followed for calculating the amount of interest on ' each instalment.. I) Calculate the outstanding cash price at the time of fii-st instalment by subtracting down payment from the total cash price. ii) Calculate interest on the - first instalment. This is to be calculated on the outstanding cash price at the time of first instalment by applying the given rate of interest, I n this connection, you should keep in view the mode of instalment I.e., whether the instalrnent is'annual, half - yearly or quarterly. IJsualSy, in case of purchases for heavy equipment the instalment is annual, iii) Calculate the amount of cash price included in the first instalment by subtracting the amount of interest a s calculated in step (ii) from the amount of the first instalment. iv) Calculate the outstanding cash price at the time of second instalment by subtracting the amount of cash price of the first instalment from the outstanding cash price a t the time of first instalment i.e., (i) - (iii). v) Calculate, interest on the second instalment by applying the rate of interest to the outstanding cash price at the time of second instalment. The amouht of the subsequent instalments can. be worked out in the same manner ' i.e., by first calculating the outstanding cash price at the time of the instalment due
and then applying the rate of interest to this amount. However, tHe amount of interest
on the last instalment is worked out differently. This can be done by simply
subtracting the outstanding cash price at the time of last instalment from the amount of the last instalment, Alternatively, you can work it out by subtracting the sum of interests of all prebious instalments from the total amount of interest included in the hire purchase price. The amount of interest so calculated can also be verified by applying the rate of interest to the outstanding cash price at the time of last instalrnent. Of course, there may be a small difference due to the fact that the hire purchase price is not fixed by inclusion of the exact amount of interest. It is usually fixed as a round figye. If however the difference happens to be a large amount, you
should check all calculations of interest and outstanding bash price a t the time of each
instalment. Illustration 1 will help you to calculate the interest with the help of the above mentioned procedure. Illustration 1
' A Ltd. purchased a machine on hire purchase from Z Ltd, on January 1,1989, paying
Rs. 8,000 immediately and agreeing to pay three annual instalments of Rs. 8,000 e a c h on December 31, every year. The cash price of the machine is Rs. 29,800 and t h e. vendors charge interest @ 5% per annum. Calculate the amount of interest paid by
- 8 the buyer to the seller every year.
Hire Purchase Acco~lntsI Solution :
The total interest is = Hire Purchase Price - Cash Price
Hire purchase Price = Cash Down Payment + Instalments = 8,000 -t- 3(8,000) = 8,000 + 24, = Rs. 32, Cash Price = Rs. 29,
SoTotal Interest = 32,000 - 29,800 = Rs. 2,200.
Now, we can calculate the interest on each instalment as follows.
i) Outstanding Cash^ Price^ at the time of first instalment
Total Cash Price - Down Payment
= Rs. 21,
ii) Interest on first instalment
Outstanding Cash Price x Rate^ of^ Interest
= Rs. 1, iii) Cash Price of first instalment
Instalment - Interest on first instalmenl
= Rs. 6,
iv) Outstanding Cash Price at the time of second^ instaln~ent O utstanding
Cash Price a t - Cash Price of the first Instalment
the time of 1st instalnlent = 21,800 - 6,
v) Interest on second instalment 14,890 x 5 = Rs. 745 100 ;li) Cash Price of second instaln~ent = 8,000 - 745 = Rs. 7, vii) Outstanding Cash ~ r ' i t eat the time = 14,890 - 7,255 = Rs. 7, viii) Interest on the last instalment
= InStalment - Outstanding Cash Price at the time oC last instalmenl
= Rs. 8,000 - 7,
= Rs. 365
Alternatively, Total Interest - Sum of Interest of all previous years
= 2,200 - (1,090 + 745) = 2,200 - 1, = Rs., 365 Verification
Outstanding Cash Price at the time of last inst. X lnstalment^. 100
= Rs. 382
As indicated earlikr, the amount calculated :~boveis not the same as calculated i n
stepS(viii). But thk difference is small i.e., Rs. 17 (382 - 365).
For Steps from (i) to (viii) following tahle would bc helpful,
You will observe that the amounts of interest for each instalment calculated with the Hlre^ Purchase^ AccounLq^ I help of ratio is almost the same as calculated with a given rate of interest.
4.4.2 ' Ascertainment of Total Cash Price Sometimes, the total cash price is not given. In such a situation w e cannot proceed
wit11 the accounting for hire purchase transaction because in the books of the buyer,
the amount to be capitalised cannot be more than the cash price. The different methods of calculation of cash price are as below : i) Without the help of annuity table ii) With the help of annuity table Let us now discuss both the methods
i) Without the Help of Annuity Table
Interest = Total amount due at the time of instalment x rate^ interest 100 t rate of interest
Under this method interest is calculated starting with the last instalment. Suppose there are three instalments. The interest will be calculated first on the third , instalment, then on the - second and lastly on the first instalment. No interest is calculated on down payment.as it does* involve any element of interest. You know that the interest is to be calculated on the outstanding amount of cash price. But since it is not known, it will have to calculated with the help of total amount due on hire purchase price. For this purpose we will have to use the following formula for calculating first - the interest involved in each instalment and then subtract this amount of interest from the total amount due, so as to work the outstanding ahount of cash price.
Let us now see what steps are followed for the calculation of Cash Pribe due at the time of each instalment assuming there are three yearly instalments.
c) Add the cash price calculated under (b) above to the instalment amou t of the first year and calculate the interest on the sum so obtained. Deduct thi (^) amount of interest from the total amount due at the end of the first year., The esultant
figure is the cash price due at the time of the first- instament '
a) Calculate the interest on the instalment of the third year, Deduct interest from this instalment. The resultant figure is the outstanding cash price at the time, of third (last) instalment.
d) Add the cash price calculated under (c) above to the down payment, if any. The sum so obtained will be the total cash'price.
b) Add the cash price calculated under (a) above to the instalment amount of the second year. Calculate the interest on the sum so obtained and subtract it from the total amount due at the end of'the second year to get the outstanding cash price at,the time of second instalment.
Illustration 3 will help you to understrind the calculation of cash price.
Illustration 3 Renuka purchased a machine on January 1,1986 on hire purchase basis for Rs. 5, payable as under :
Rs. Down Payment 930 At the end of 1st year I 1, (1st-instalment)
At the end L E 2nd year 1,
(2nd instalment) At the end of 3rd year 840 (3rd instalment) Rate of Interest 5% p.a, (^) ,. -. Calculate the Cash Price of the machine and interest paid with each instalment.
-. Hire Purchase Accounts ' Solution :
Amount I
Total Amount Dueon 3rd lnstalnent (last) I 840
Less Interest d Outstanding Cash Price of 3rd Instalment Add 2nd Instalrnent
Total Amount due on 2nd Instalrnent I ?_ , -Less Interest
Add 1st Instalrnent
Total Amount dueon 1st Instalment Less Interest
Add Down Payment
Total Cash Price
Interest
So Total Cash Pricc is Rs. 4,650 and Total Interest Rs. 350. Notc : This calculation can be verified by following the procedure givcn for calculation of interest on each instalrnent when the cash price, instalments, down payment and rate of interest are given.
ii) With the Help of an Annuity Table If the,annuity fable is available,.the calculation of, interest involved in eaih instalrnent is simplified. In the annuity table the rate of interest is given in the rows and the years in the columps. With ~eferenceto the table, the present value of each instalment can be~calculated.The sum of these present values as calculated, if added to the cash down payment gives us thc cash price. The procedure is as follows : a) See the given rate of interest in the row and the year in the column and find out the corresponding figure to the interest and year in the table. b) This figure is the presk'nt value of Re. 1 c) Multiply the prcsent value of Re. 1 with the amount of the instalment. d) The resulting figure is the present value of the instalment. This is nothing but the amount of cash price included in the instalment. , C) Calculate the present values of all the instalrnents in same manner. f) Add the present values of all the instalments to the,down payment if any. T,Me resultant figure will be the toli11cl1s11 price.
Illustration 4 will help us to understand the calcula&on of total cash price with' the help of the annuity table.
.X Ltd. purchased a machine on hire purchase s y stem. The payment is made as follows :
Rs. \
Down Payment 232. 1st Instalrnent 356. 2nd lnstalment 451 3rd Instalmerrt 210 The payments are made at the end of 1st year, 2nd year and 3rd year respectively. The rate of interest is 5% p.a, Thc annuity table shows that the present value o f. Re. 1 for one, two and three years is .9524, ,9070 and .8539 respectively. Calculate the cash price of the machine. I
Hire Purchase Accounts (^) i) When the asset is recorded at full cash price, and
ii) When the asset is recorded at the cash price actually paid. Let us now discuss these methods in detail. -. 4.5.1 When the Asset,is Recorded at Full Cash Price / In this method when the asset is purchased on hire purchase, it is assumed that the purchaser has full intention of paying a 1 the instalments. It is believed that hire purchase is just B method of financing fixek assets. Under this method, on purchase of plant and machinery, the Plant & Machinery Account (Fixed Asset) is debited with , the total amount of Cash Price, and the corresponding credit is given to Hire Vendor's Account. Interest is recognised and accounted for at the time of instalments becomes due by debiting the Interest Account and crediting the Hire Vendor's Account. For the purpole of accounting fbor initial cash down payment and annual instalments, the Hire Vendor's Alc is debited on the relevant date, and the credit is given to Bank Account. The following jdrurnai entries are passed in the books of the purchaser. 1 When the asset is purchased on hire purchase Asset A/c Dr To Hire Vendor (With tbi: total cash price) ' I 2 For cash down payment - - Hire Vendor Dr. Td Bank A/c 3, When the first instalment becomes due
Interest Alc. Dr.
To Hire Vendor 4 Whery3he first instalment is paid Hire Vendor Dr. To Bank A/c
-^ For Depreciation Charge^ (at-the end of accounting period) Depreciation. Dr. To Asset Alc 6 For tr sfek of interest and depreciation to Profit & Loss.A/c Profi 9 " & Loss Alc Dr. To Interest Alc To .Depreciation A/c
Entries 3 and 4 will be repeated for all subsequent instalments.
With the help of the journal entries we can easily.prepare the Asset Account and the Hire vendor's Account. Look at Illystration 5 and see how the journal entries are passed and ledger accounts made in the books of the purchaser.
IIlustration 5 - ABC Ltd. bought on-&.1.86 a machine from XYZ Ltd. Under a hire purchase system of payment under which three annual instalments of Rs. 2,412 would be paid. There is no down payment and the cash price is Rs. 6,000, The rate 'ofinterest would be 10% and depreciation @ 20% p.a. would be charged on straight line basis. Solution : Let us first find out all the information. - required.
1) Date of Purchase - January 1,1986; No down payment.
- Dats.at which the instalments become due - December 31,1986,1987 and 1988.
- Date of closure of accounts - Dhsmber 31.
5 1 H 3 e Purchase prick- Rs.3,412 x 3 = Rs. 7,236.
6 ) Number, amouni and mode of each instalment 3 instalments of - Rs. 2,412 each
payable annually. ,
- date of Interest - 10% p.a.
- &&,of Depreciation -.20°!? ,d.a. 9Y ~ 6 t h o d o fdeerqiiation --straight L i e.
Journal Entries in the Books of ABC Ltd.
Date Particulars Amount (Dr.) A~nour~t(Cr.) I I. 1986 Jan. 1
Dec. 31
Dec. 31
Dec. 31
1987 Dec. 31
Dec. 31
Dec. 31
Dec. 31
1988 .' Dec. 31
Dec. 31
Dec. 31
~ e c ' 31
,. 1 '
Machinery Alc Dr. To XYZ Ltd. (Being a machine purchased on hire purchase)
Interest A/c Dr. To XYZ Ltd. (Being the charge of interest @ 10% on Rs. 6,000)
Depreciation A/c Dr. To Machinery A/c (Being the charge of depreciation)
XYZ Ltd. A/c Dr. To Bank Alc (Being the payment of annual instalment)
Profit & Loss Ai'c Dr. To Interest Alc To Depreciation Alc (Being the annual charges transferred to Profit & Loss AIc)
Interest Alc Dr. To XYZ Ltd. (Being the charge of interest @ 10% on , Rs. 4,188)
Depreciation A/c Dr. To Machinery Alc (Being the annual charge of depreciation)
XYZ Ltd. A/c Dr. To Bank A/c (Being the payment of annual instalrnent)
Profit & LOSS A/c Dr. To Interest A/c To Depreciation A/c (Being the transfer of annual charges to Profit & Loss A/c)
Interest Alc Dr. To XYZ Ltd. (Being the charge of interest @ 10% on Rs. 2,194)
Depreciation A(c Dr. T o Machinery Alc (Being the annual charge of depreciation)
XYZ Ltd. Alc Dr. TO Bank A/c (Being the3rd and final instalment paid).
Profit & Loss Alc Dr. I T o Interest Alc T O ~epreciationAlc I (Being tire transfer of annual charges to' Profit & Loss Alc)
Rs. 6,
Hire Purchase Accounts I
Rs. 6,
4.5.2 When the Asset is Recorded at Cash Price Actually Paid.^ Hlre^ Purchase^ Accouata^ I you know that in case of hire purchase, the ownership of the goods passes to the hire purchaser after the last instalment has been paid. Since the goods do not become the property of the purchaser, he does not have any right to debit the asset at its full price. Hence, no entry is passed whenthe asset is purchased unless it involves down payment. The entries are passed as and when the instalments become due and the amount is paid towards the price of the article. The journal entries are as follows : 1 When the asset is purchased No entry 2 When the down payments is made
. Asset Alc To Bank Alc 3 When the instalment becomes due Asset Alc Dr. (cash price part of instalment) Interest Alc Dr. (interest on instalment) To Hire Vendor 4 When instalment is paid Hire Vendor To Bank Alc
Dr.
5 When Depreciation is charged Depreciation Alc Dr. To Asset Alc 6 When Interest and depreciation accounts are closed by transfer to Profit & Loss Alc Profit & Loss Alc Dr. To Interest. Alc To Depreciation A/c
It should be noted that though the asset account is debited with the amount of the casll price paid (not full cash price), the depreciation is charged on the full cash price. The Balance Sheet will reflect the amount of cash price debited to the asset account minus depreciation charged. Look a the ~llup(ration 6 and see how accounting records are maintained in case - the asset is record$ at cash price actually paid. ! Illustration 6. Solve Illustration 6 by debiting the asset account at cash price actually paid. Solution :
Journal Entries in the Books of ABC Ltd.
Date.
1986 Dec. 31
Dec. 31
Dec. 31
Machinery A/c Dr. Interest A/c Dr. T O XYZ Ltd. I '{Being first instalment due)
XYZ Ltd Dr. To Bank A/c {Being first instalment paid)
Depreciation Alc (^) I I^. Dr. To Asset A/c {Being annual depreciation charged)
Profit & Loss A/c '
To Depreciation N c To Interest N c
Dr.
{Being annual charges transferred to Profit.& Loss A/c)
Amount (Dr.)
Rs. 1, 600
Amount (Cr.)
- -... Hire Purcllase Acco~mts (^) Date Perticulers Amount (Dr.) Amount (Cr.)
(Beingsecond instalment due)
To Cank Alc (Being second instalment paid)
To Asset Alc (Being annual depreciation charged)
Profit & Loss Alc To Depreciat~on Alc 'ro Interest Alc ( B e ~ l ~ gannual charges trnnsfrrred to Profit Sr Loss Alc)
ToXYZ Ltd. (Being third instalrnent due)
To Bank A/c (Being third instaln~entpaid)
To Asset A/c (Being annual depreciation chargcd)
Profit cYc Loss Alc To Deprcciat~on Alc To Interest Alc (Being annual charges transferred to Profit & Loss Alc)
Note: Dcpreciation has been charged on straight line method @ 20% p.u. at the full cash price of Rs. 6.000.
4.6 ACCOUNTING RECORDS IN THE BOOKS OF VENDOR --
So.far as the vendor is concerned a hire purchase sale is just like an ordinary sale with the exception that payment is deferred over a period of time for which the vendor charged interest, He debits the Hire Purchaser's A/c with full cash price and credit is given, to Sales A/c. The interest amount il debited to Hire Purchaser's N c cis and when the instalments become due. Instalment amounts received are credited to the Hire Purchaser's Alc and debited to Bank A/c. The journal eptries passed are as fc)lluws: 1 611 sale of gwds under hire purchase Hire Purchaser 'To Sales Alc 2 On receiving cash down payment Bank Alc To Hire Purchaser 3 On instalment becoming due Hire Purchaser To lnlerest A/c
Dr. (with full cash price)
Dr.
Dr.
Hire Purchnse Acco~~nts (^) Check Your Progress C
1) Enlist the information required before solving the hire purchase problem.
- State\ hether following statements are True or False. T '
i) When the asset is recorded at full cash price, the hire purchase becomes a
method of finhncing the fixed asset. ii) When the asset is recorded at the price actually paid the Asset Alc is debited and the Hire Vendor's A/c is credited with full cash price. iii) The Hire Vendor debits the hire purchaser and credits the sales on sale of goods with cash price. iv) When the asset is recorded at cash price actually paid no entry is passed when the instalment becomes due. v) The Hire Vendor's Alc is in the nature of a personal account.
4.7 LET US SUM UP
In the hire purchase agreement the buyer takes the delivery of the goods and promises t o pay the price in instalments. Under this agreement, though the buyer takes the possession of the goods, but he does not have the ownership. The ownership of the goods passes only after the last instalment has been paid. ~ n ' c a s ethe buyer fails to pay any of the instalments, the seller can take back the possession of the goods. ,
The hire purchase price is always more than the cash price, the difference between the two is the interest charged for deferred payment. If two of the three items of information i,e., hire purchase price,cash price and interest, are given, the third can be found out with the help of the formula HP = CP + 1ntere:t (HP is hire purchase price and CP is cash price). Both the parties to hire purchase agreement i.e., the v e n d ~ raqd the purchaser record the hire purchase transactions in their books. The purchaser can prepare accounting records in two ways : (i) When the asset 'is recorded a t full cash price, or (ii) When the asset is recorded at the cash price actually paid. The purchaser mainly maintains two accounts i.e., the Hire Vendor Account and the Asset Account. The vendor on the other hand maintains the Hire Purchaser's Account and the Interest Account.
4.8. KEY WORDS
Agreement to Sell :In a contract of sale, when the ownCrship of goods sold is to pass to the buyer subject to fulfiImenl'of certain conditions, such sale is termed -$ an agreement to sell. r Cash Price : The amount to be paid in outright sale on cash. Down Payment : Initial payment made at the time of purdhase under hire purchase agreement. I Hire Charges : If the hirer in a hire purchase agreement fails t o pay even the last instalment, the amounts he has paid so far, will be txeated as hire charges for using , the asset. Hire Purchase : An agreement to sell under which the buyer takes the delivery of goods promising to pay the price in instalments and until full payment is made, to treat payment as hire charges for using the goods. .Hire Purchaser : The purchaser in a hire purchase contract.
Hire Vendor : The seller in a hire purchase agreement who agrees to receive the price in instalments, and has the right to treat the amounts paid by the hirer as hire charges if the hirer fails to pay the last instalment. Instalment Payment system : When the price in a contract of sale is paid over a period of time, but at fixed intervals the system of.payment iwalled instalment payment.
4.9 ANSWERSTO CHECK YOUR PROGRESS
I A 1 i) agreement, / ii) sell, iii) pass, conditions, iv) instalment, v) hire charges, vi) repossess, vii) writing, viii) terminate, ' ix) right, title 2 i) False ii) True iii) False iv) True ' v) False vi) False
B 1 i) Total interest = Rs. 51(25+17$9) ii) Total interest = Rs. 500 (264i-178-t-58)
2 i) Cash Price = Rs. 18,616, ii) Cash Price = 43,
C 1 i) True ii) False iii) True iv) False v) True
4.10 TERMINAL OUESTIONS AND EXERCISES
Questions
- What are the characteristics of a hire purchase agreement?,
- Describe the rights of a hirer under hire purchase agreement.
- What steps would you take to calculate th'e interest when the total cash price and instalments are given?
. Exerclses
1 Based on particulars given below, give entries in the books of the purchaser and the seller both under the hire purchase system : a) Rarnesh & Co. - Purchaser Date of Purchase - Jan. 1, 1989 goods purchased - Trucks; Cash Price - Rs, 1,49,000. Instalments Rs, 40,000 on signing of the agreement, Rest in three instalments of,Rs. 40,000 each, Rate of interest - 5%. Depreciation
- 10% on the diminishing balance. b) All particulars as above except that the rate of interest is not given, c) All particulais as In (a) above except that the cash price Is not given.
2 Hire Yurchases Ltd. purchased motor car on hire purchase system Rs. 12,
was payable on delivery i.e., on 1.1.89 and the rest in four, equal instalments of Rs: 12,000 each payable at the end of each year. The seller, Hire Vendors Ltd. agreed to charge interest @ 5% on-the yearly balances, The cash price of the car t was Rs. 54,551. Depreciation @ 25% on written down values was to be written off in each year. ~ i v ethe necessary journal entries and ledger accounts in the books of Hire " Purichasers Ltd. ( ~ h s w e r: Total Interest Rs. 5,449. The written down value of the car at the end of fourth year is Rs, 17,260) 3 Dinesh Ltd., on 'April 1, 1989, purchased a machine from Rajesh Ltd., on hire purchase basis. The c-sh price of the machine was Rs. 25,000. The payment was to be made Rs. 5,000 on the date of the contract and the balance in four annual
instalments of Rs. 5,000 each plus interest at 5% per annum payable on
Pecember 31 each year, and the first such instalment being payable on 31.12.89. .Depreciation is to be charged @ 10% on original cost,
. Show the journal entries and ledger accounts in the books of both the parties.
' b?) (Answer : The amount of total interest Rs. 2,500, balance of Machinery A/c on
1,1.93 Rs. 15,000).
