TOPIC 7: HIRE PURCHASE ACCOUNTING
HIRE PURCHASE TRANSACTIONS
As a system of trading, hire purchase is governed by the hire purchase act. Under this system the buyer agrees to pay for the goods by installments.
The property in goods remains with the seller and the buyer pays hire charges over a stipulated period of time at the end of which the pays a further amount called an option to purchase/ option fee which then gives him ownership. The buyer obtains possession for the goods and uses them, but ownership for the goods will pass from the seller to the buyer when the latter pays the final installment. If the buyer he fails to pay any installment, then seller will be entitled to take back the goods (repossess) and the buyer shall have no any claim over the installment he already paid.
ACCOUNTING PART
- Buyers books.
- Sellers books.
Hire- purchase transactions in the buyers books
Goods which are dealt with are usually fixed assets such as motorcars, refrigerators and etc.
The hire purchase price actually it consists of two elements:-
- Cash “cost” price and
- Hire purchase interest.
This acts as compensation to the seller for delay in receiving a full payment at once and also for covering up some attendant risks.
N.B
It is a normal accounting policy to treat hire purchase transactions as actual sales or purchase, because the intentions of the buyer 1st pay the whole amount through installments.
Methods of writing off the title purchase interest.
- Straight line / fixed installment methods.
- Sum of the digits method (or rule of 78 methods).
- Actuarial method.
This interest should be written off to P & L A/C over the period of the hire purchase contract.
- Straight line method
Under this method, the hire purchase interest written off on the straight line basis. Therefore the hire purchase interest per installment due = (Total hire purchase /Interest)/(Total number of interest).
- Some of the years’ digits method
This is an arithmetical method of apportioning the hire purchase interest in approximate proportion to the amount outstanding at any time.
Procedure
- Number the installments e.g. 3 installments
1
2
3
- Assign the highest digit to the first installment and digit one to the last installment
Installment digits
1 3
2 2
3 1
- Sum up the digits 6
- Apportion the H.P. interest e.g I H.P interest = Tshs 36000
- Apportion the H.P. interest e.g I H.P interest = Tshs 36000
1st Year hire purchase interest =3/6 x 36000
= 18000
2nd year hire purchase interest = 2/6 x 36000
= 12000
3rd year hire purchase interest = 1/6 x 36000
- =6000
-
Buyer’s books continue
- Actuarial method
This is method of the writing off the hire purchase interest based on the reducing balance phenomenon.
This method can be used in the presence of the following items:-
Cash price, deposit, (not necessary) rate of interest, number of installments together with their respective amounts.
Working:-
| cash price | xxx |
| less; Deposit | xx |
| Balance subject to H.P Interest | xxx |
| Add; Hire purchase interest;1st yr | xx |
| xxx | |
| Deduct; 1st yr installment paid | xxx |
| Balance subject to H.P Interest | xxx |
| Add; hire purchase interest;2nd yr | xx |
| xxx | |
| Deduct; 2nd yr installment paid | xxx |
| Balance subject to H.P Interest | xx |
| Add; hire purchase inter.3rd yr | xx |
| xx | |
| Deduct; 3rd and final instal. Paid | xx |
| NIL | |
METHOD OF RECORDING.
There are two alternative methods of recording.
Method A
Accounting entries:
With the cash “cost price
With the proportion of the H.P interest when
Installment is due
With the deposit + installment paid
N.B
Balance on the vendor A/C represents the unpaid portion of the cash price, which should be included under current liabilities in the B/S.
METHOD B
1. Dr. Fixed assets A/C with the cash price
Dr H.P interest suspense A/C with the total H.P interest
Cr, vendors A/C with total H.P price.
with the proportion of the H.P interest installment is due
with the deposit + installment paid
N.B
The balance on the vendor A/C less the balance of hires purchase interest suspense A/ shall be included current liabilities in the balance sheet.
Example
On 1st Jan 1991, contractor’s ltd bought a hydraulic crane from Hi – lift ltd on hire purchase. The terms o f H.P contract were initial deposit of Tshs 40000 was payable followed by 3 installments of Tshs 37978 on 1st Dec in each of the next three years from 1991 onwards. The cost of the crane for cash purchase would have Tshs. 120,000. Interest is charged on the balance out standing 31st Dec at the rate of 20% p.a. the final year of both company’s end 31st Dec.
Required
- What was amount of H.P. Interest included in the H.P price?
- What amount of interest could allocated in each of three years if the sum of digits method were used.
- Prepare the relevant ledger a/c contraction ltd ledger for each of the three year ended 31st Dec 1991, 1992, 1993 base on the assumption that contractors ltd charges depreciation on his fixed assets. Using a straight line method in addition 20% p.a interest rate is in uses.
Solution
| cash price | 120,000 |
| less; Deposit | 40,000 |
| Balance subject to H.P Interest | 80,000 |
| Add; H.p 1st yr 20/100 x 80,000 | 16,000 |
| 96,000 | |
| Deduct; 1st yr installment paid | 37978 |
| Balance subject to H.P Interest | 58022 |
| Add; 2nd yr H.P interest 20/100 x 58022 | 11604 |
| 69626 | |
| Deduct; 2nd yr installment paid | 37978 |
| Balance subject to H.P Interest | 31648 |
| Add; hire purchase inter.3rd yr 20/100 x 31648 | 6330 |
| 37978 | |
| Deduct; 3rd and final instal. Paid | -37978 |
| NIL | |
- a) Hire purchase = Total H.P price – cash price
= Deposit + 3 installments – cash price
= (40000 + 3 x 37978) – 120,000
= Tshs.33934
- Calculate of the H.P. interest by the sum of the digit method.
Proportion of the H.P interest
1st year; 3/6 x 33934 = 16967
2nd year; 2/6 x 33934 = 11311
3rd year; 1/6 x 33934 = 5656
DR HI- LIFT COMPANY ACCOUNT CR
| 1/1/1991 | Hi-lift company | 120,000 | 31.12.1991 | Bal. c/d | 120,000 |
| 120,000 | 120,000 | ||||
| 1/1/1992 | Bal. b/d | 120,000 | 31.12.1992 | Bal. c/d | 120,000 |
| 120,000 | 120,000 | ||||
| 1/1/1993 | Bal. b/d | 120,000 | 31.12.1993 | Bal. c/d | 120,000 |
| 120,000 | 120,000 | ||||
| 1/1/1994 | Bal. b/d | 120,000 | |||
DR HIRE PURCHASE INTEREST EXPENSE ACCOUNT CR
| 31/12/1991 | Hi-lift coy | 16,000 | 31.12.91 | P & L | 16,000 |
| 16,000 | 16,000 | ||||
| 31/12/1992 | Hi-lift coy | 11604 | 31.12.92 | P & L | 11604 |
| 11604 | 11604 | ||||
| 31/12/1993 | Hi-lift coy | 6330 | 31.12.93 | P & L | 6330 |
| 6330 | 6330 | ||||
Example 2
A firm acquired two transport lames under hire purchase agreements, details of which are as follows:
Registration number KQ710 KU600
Date of purchase 30TH May 1998 30th October 1998
Cash price 540000 720000
Deposit 93600 144000.
Interest (deemed to accrue)
Every over the period of the
Agreement) 76800 96000
Both agreements provided for the payment to be made in twenty four equal monthly installments commencing on the last day of the mount following purchase.
On 1st July 1999 vehicle KQ710 become a total loss in full settlement on 10th July 1999.
- An insurance company paid Tshs 42000 under a comprehensive policy and
- The hire purchase company accepted Tshs 190000 for the termination of the agreement.
The firm prepared the accounts annually to 31st December, and provided depreciation on a straight line basis at a rate of 25% per annum for motor vehicle. With a full year depreciation in the year of purchase no depreciation being provided in the year of disposal.
All installments were paid on the due dates.
Required:
Record these transactions in the following accounts, carrying down the balance as on 31 Dec 1999.
- Motor vehicles
- Provision for depreciation
- Motor vehicles disposal
- Hire purchase company
- Hire purchase interest suspense A/C
DR MOTOR VEHICLE ACCOUNT CR
| 30/4/98 | H.P company | 540,000 | 31/12/98 | Balance c/d | 126,000 |
| 30/9/98 | H.P company | 720,000 | |||
| 126,0000 | 126,0000 | ||||
| 1/7/1999 | M.vehicle disposal | 540,000 | |||
| 31/12/99 | Balance c/d | 720,000 | |||
| 126,0000 | 126,0000 | ||||
| 1/1/2000 | Balance b/d | 720,000 | |||
Total installment paid for 1998 for
| KQ710 | KV600 | |
| 31/5 – 31/12/98 ( 7 months) | 2 months | |
| 7 x 21800 | 2×28000 | |
| =152,600 | = 56,000 |
152,600 + 56,000 = 208,600
DR HIRE PURCHASE COMPANY ACCOUNT CR
| 30/4/98 | cash(deposit KU) | 93600 | 30/4/98 | Motor vehicle | 540,000 |
| cash(deposit KU) | 144000 | 30/4/98 | H.P Interest | 76800 | |
| cash(KQ + KU) | 208600 | 30/9/98 | Motor vehicles | 720,000 | |
| 31/12/1998 | Balance c/d | 986,600 | 30/4/98 | H.P Interest sus. | 96,000 |
| 1432800 | 1,432,800 | ||||
| 10/7/1999 | cash(KQ) | 130800 | Balance b/d | 986,600 | |
| 10/7/1999 | cash | 190,000 | |||
| 10/7/1999 | H.P interest susp. | 49800 | |||
| 31/12/99 | cash(KU) | 336,000 | |||
| 31/12/99 | Balance c/d | 280,000 | |||
| 986,600 | 986,600 | ||||
DR HIRE PURCHASE INTEREST SUSPENSE ACCOUNT CR
| 30/4/98 | H.P company | 76800 | 31/12/98 | P & L | 30400 |
| 30/4/98 | H.P company | 96,000 | 31/12/98 | Balance c/d | 142400 |
| 172,800 | 172800 | ||||
| 1/1/1999 | Balance b/d | 172,800 | 10/7/1999 | H.P company(disc) | 49800 |
| 31/12/99 | P & L(KQ) | 4600 | |||
| 31/12/99 | P & L(KU) | 48000 | |||
| 31/12/99 | Balance c/d | 40000 | |||
| 142,400 | 142,400 | ||||
| 1/1/2000 | Balance b/d | 40,000 |
DR M. VEHICLE ACCOUNT PROV.FOR DEPREC. ACCOUNT CR
| Balance c/d | 315,000 | 31/12/98 | P & L | 315,000 | |
| 315,000 | 315,000 | ||||
| Disposal | 135,000 | 1/1/199 | Balance b/d | 315000 | |
| Balance c/d | 360,000 | 31/12/99 | P & L | 180,000 | |
| 495,000 | 495,000 | ||||
DR MOTOR VEHICLE DISPOSAL ACCOUNT CR
| 1/7/1999 | Motor vehicles | 540,000 | 1/7/1999 | M.V prov.for depr. | 135,000 |
| 31/12/1999 | P&L (piolt on disposal) | 15000 | 1/7/1999 | cash | 420,000 |
| 555,000 | 555,000 | ||||
Total installment paid up to 1/7/1999
For ( KQ) = 6 X 21800
= 130,800
For (KV) = 28000 X 12 = 336,000
24-(6+7)=11 Months
Installment due = 11 x 21800
= 239800
= 239800 – 190,000
= 49800
- J. York was acquiring two cars under hire purchase agreements details of which are as follows.
Registration number JY 1 JY2
Date of purchase 31 June 20 x 6 30 Nov 20 x6
Cash price £ 18,000 £ 24,000
Deposit £ 3120 £ 4800
Interest (deemed to accrue every
Over the period of the agreement) £ 1920 £ 2400
Both agreements provided for payment to be made in 24 monthly installment commencing on the last day of the month following purchase.
On 1 September 20 x 7, vehicle Jy 1 becomes a total loss. In full settlement on
30 September 20 x7
- An insurance co. paid 12500 under a comprehensive policy.
- The hire purchase company accepted 6000 for the termination of the agreement.
The firm prepared accounts annually to 31 Dec and provided depreciation on a straight line basis at a rate of 20 percent per Annam for motor, apportioned as from the date of purchase and up to the date of disposal.
All installments were paid on due dates
The balance on the hire purchase company account in respect of vehicle Jy 1 is to be written off
You are required to record these transactions in the following accounts, carrying down the balance as on 31 Dec 20 x 2
- Motor vehicle
- Depreciation
- Hire purchase company
- Assets disposal
| Solution | Jy 1 | Jy2 |
| Cost price | 18000 | 24000 |
| Less: deposit | 3,120 | 4800 |
| 14880 | 19200 | |
| Add: H.P Interest | 1920 | 2400 |
| Total installment payable | 16800 | 21600 |
| 16800 | 21600 | |
| 24 | 24 | |
| Monthly installment paid | 700 | 900 |
| Total interest payable | 1920 | 2400 |
| 24 | 24 | |
| Monthly interest payable | = 80 | = 100 |
DR MOTOR VEHICLE ACCOUNT CR
| 31.12.2006 | H.P company | 18,000 | 31.12.2006 | Balance c/d | 42,000 |
| 30.10.2006 | H.P company | 24,000 | |||
| 42,000 | 42,000 | ||||
| 1.1.2007 | Balance b/d | 42,000 | 1/9/2007 | M.V (Disposal) | 18,000 |
| 31.12.2007 | Balance c/d | 24,000 | |||
| 42,000 | 42,000 | ||||
Total installment paid for 2006 (4200 + 900) = 5100
JY1 30/6/2006 – 31/12/2006 JY2 31.11.2006 – 31.12.2006
6 x 700 = 4200 900 x 1 = 900
Total installment paid up 1/9/2007
JY1 = 700 x 8 = 5600
JY2 = 900 x 12= 10800
Installment due = 24 – (6+8) = 10
= 700 x 10 = 7000
= 7000 – 6000
= 1000
DR MOTOR VEHICLE DEPRECIATION ACCOUNT CR
| 31.12.2006 | Balance c/d | 84,000 | 31/12/2006 | P & L | 84000 |
| 84000 | 84000 | ||||
| 1.08.2007 | Disposal | 5300 | 1.1.2007 | Balance b/d | 84000 |
| 31.12.2007 | Balance c/d | 78700 | |||
| 84000 | 84000 | ||||
| 1.1.2008 | Balance b/d | 78700 | |||
DR DISPOSAL ACCOUNT CR
| 31.5.2006 | Motor vehicle | 18,000 | M/vehicle prov. | ||
| cash | 12500 | ||||
| P&L | 5500 | ||||
| 18000 | 18000 | ||||
DR HIRE PURCHASE INTEREST SUSPENSE ACCOUNT CR
| 31.5.2006 | H.P company | 1920 | 31.12.2006 | P & L | 580 |
| 30.10.2006 | H.P company | 2400 | 31.12.2006 | Balance c/d | 3740 |
| 4320 | 4320 | ||||
| 1.1.2007 | Balance b/d | 3740 | H.P company (discount) | 1000 | |
| 31.12.2007 | P & L (JY1) | 440 | |||
| 31.12.2007 | P & L (JY2) | 1200 | |||
| 31.12.2007 | Balance c/d | 1100 | |||
| 3740 | 3740 | ||||
| 1.1.2008 | Balance b/d | 1100 | |||
Interest payable (Total) JY1 P& L
JY1 = 80x 6 = 480 31/6 – 31/12 = 6 months
JY2 = 100 x 1 = 100 24 – 6 = 18
580 18 x 80 = 1440
IN SELLER’S BOOKS
Goods can be categorized into two major categories
- Large items
- Small items
Large items
These are the one which business buyers treat as fixed assets. In this case the amounts involved are substantial and transactions are relatively infrequent. Therefore the supplier is able to identify transactions surrounding each class of goods under hire purchase will ease. That is, the supplier can spread the gross profit and hire purchase interest over the hire purchase contract without much difficulty.
The hire purchase selling is made up of the following elements;
- Cost price plus gross profit giving the cash selling price.
- Cash selling price plus the hire purchase interest giving hire purchase selling price.
- H.P selling price = cost price + gross profit + hire purchase interest.
Accounting methods
Two alternative methods exist
METHOD A
Accounting entries
with cash selling price
with proportion of H.P interest when the installment is due
With deposit + installments received
N.B
The balance on the H.P customer A/C at the end of the period, represents the cash sales price not yet due or received. Still at the end of the period, the following entries will be made.
With cost of goods sold on hire purchase
with transfer of balance on H.P sales and H.P interest received
DR H.P TRADING ACCOUNT CR
| cost of goods sold | xxx | H.P sales(cash sale price) | xxx |
| prov.for unrealized profit | xxx | H.P interest received | xxx |
| Gross profit | xxx | ||
| xxxx | xxxx | ||
The provision for unrealized profit is raised to suspend the appropriate portion of the gross profit included in the selling price.
Formula: prov for unrealized profit =
Or
%, margin x balance on cash not yet due
Entry
Dr; H.P trading A/C
CR; prov for unrealized profit A/C
This provision needs recalculations, and the difference between the opening and closing balance shall be transferred to the H.P Trading A/C
N.B
The balancing figure on the H.P trading A/C shall represent pure gross profit and H.P interest earned during the period.
And the balance on the H.P customer A/C (if any ) at the end of the period, will be include under current assets in the balance sheet as H.P customer yet due.
Method B. (HIRE PURCHASE SUSPENSE ACCOUNT)
- DR H.P customer (debtor) A/C with the total H.P selling price.
Cr H.P sales A/C with cash selling price
Cr H.P interest suspense A/C with the total H.P interest
with deposit + installment received
with release of the appropriate portion of H.P
interest when the installments due.
N.B At the end of the period, the balance on the H.P customers A/C will represent H.P debtors owing but not yet due & shall be included under current assets in the balance sheet.
Still at the end of the period the following entries will be made.
with transfer of balance on H.P sales + H.P interest received to H.P Trading
with cost of goods sold on hire purchase
with the creation of the provision for unrealized profit
N.B
The balancing figure on the H.P Trading A/C shall represent pure gross profit and H.P interest earned during the period.
Example:
Bulwell aggregates ltd wish to expand their transport fleet and have purchases three heavy Lorries with a list price of Tshs 18000 each Robert Bulwell has negotiated hire purchase finance to fund this expansion, and the company has entered in a hire purchase agreement with grariby Garages Pluc 1 Jan 2001. The agreement states that Bulwell aggregates will pay a deposit of Tshs 9000 on 1 January 2001 and two annual installments of Tshs 24000 each on 31 Dec 2001, 2002 and a final installment of Tshs 20391, on 31 Dec 2003.
Interest is to be calculated at 25% on the balance outstanding on 1 Jan each year and paid on 31 Dec each year.
The depreciation policy of Bulwell Aggregates ltd is to write off the vehicles over a four year period using the straight line method and assuming a scrap value of shs1333 for each.
Required
- Account for the above transaction in the books of Grariby Garages PLC, and showing the entries in the hire purchase trading account for the years 2001, 2002, 2003. This is the only hire purchase transaction and under taken by this company.
Solution
| cash price; 3 x 18000 | 54000 | |
| less; deposit | 9000 | 45,000 |
| Add; 1st year H.P interest 25/100 x 45000 | 11250 | 56,250 |
| Deduct; 1st year installment paid | 24000 | 32,250 |
| Add; 2nd year H.P interest 25/100 x 32,250 | 8063 | 40,313 |
| Deduct; 2nd year installment paid | 24000 | 16,313 |
| Add; 3rd year H.P interest 25/100 x 16313 | 4078 | 20,391 |
| Deduct; 3rd & final installment paid | 20391 | |
| NIL |
DR SALE S ACCOUNT CR
| 31.12.01 | H.P Trading | 54000 | 1/1/2001 | H.P Debtors | 54000 |
| 54,000 | 54,000 | ||||
DR H.P TRADING ACCOUNT FOR YEAR ENDED 31.12.01 CR
| cost of goods | 42,000 | sales | 54000 |
| Provision for unrealized profit | 7167 | H.P interest received | 11250 |
| Gross profit | 16083 | ||
| 65250 | 65250 |
DR H.P TRADING ACCOUNT FIR THE YEAR ENDED 31.12.03 CR
| Gross profit | 4078 | H.P interest received | 4078 |
DR PROVISION FOR UNREALIZED PROFIT ACCOUNT CR
| 31.12.01 | Balance c/d | 7167 | 31.12.01 | H.P Trading | 7167 |
| 7167 | 7167 | ||||
| 31.11.02 | H.P Trading | 3542 | 1.1.2002 | Balance b/d | 7167 |
| 31.12.02 | Balance c/d | 3625 | |||
| 7167 | 7167 | ||||
| 1.01.2003 | Balance c/d | 3625 |
DR HIRE PURCHASE INTEREST RECEIVED ACCOUNT CR
| 31.12.01 | H.P Trading | 11250 | 31.12.01 | H.P Debtor | 11250 |
| 11250 | 11250 | ||||
| 31.12.02 | H.P Trading | 8063 | 31.12.02 | H.P Debtor | 8063 |
| 8063 | 8063 | ||||
| 31.12.03 | H.P Trading | 4078 | 31.12.03 | H.P Debtor | 4078 |
| 4078 | 4078 | ||||
Calculation for provision for unrealized profit
| For 2001; Prov. For unrealized profit= | cash sales not due x gross profit/ Total cash sales |
| (32250 x 12000)/54000 = 7167 | |
| For 2002; | |
| (16313×12000)/54,000=3625 |
EXERCISE
Songambele transport company ltd acquired 2 new 30 tone at calculated units on 1st Jan 1990 for Tshs 258300, the vehicles were supplied and financed by Uvuruge ltd and the terms of H.P contract required a deposit of Tshs 60000 on delivery, followed by 3 installments on 31st Dec 1990, 1991 and 1992 of Tshs 66000, 66000 and Tshs 66300.
Required
Prepaid their appropriate A/C in the books of Uvuruge ltd to record the above transaction for each of the tree years
Solution
Cash price 180,000
Less: deposit 60,000
120,000
Add: 1st yr H.P interest (30/100 x 170000) 36,000
156,000
Deduct: 1st H.P installment 66,000
90,000
Add: 2nd yr H.P interest 930/100 x 90000) 127,000
117,000
Deduct: 2nd yr installment 66,000
51,000
Add: 3rd H.P interest (30/100 x 51000) 15,300
66,300
Deduct: 3rd installment 66,300
NIL
DR SONGAMBELE (Debtors) ACCOUNT CR
| 1.1.90 | H.P sales | 180,000 | 31.12.90 | cash(Deposit) | 60,000 |
| H.P interest received | 36,000 | 31.12.90 | cash( Deposit) | 66,000 | |
| 31.12.90 | Balance c/d | 90,000 | |||
| 216,000 | 216,000 | ||||
| 1.1.91 | Balance b/d | 90,000 | 31.12.91 | cash(installment) | 66,000 |
| 31.12.91 | H.P interest received | 27,000 | 31.12.91 | Balance c/d | 51,000 |
| 117,000 | 117,000 | ||||
| 1.1.92 | Balance b/d | 51,000 | 31.12.92 | cash(installment) | 66,300 |
| H.P interest received | 15,300 | ||||
| 66,300 | 66,300 | ||||
DR SALES ACCOUNT CR
| 31.12.90 | H.P Trading | 180,000 | 1.1.90 | Debtors | 180,000 |
| 180,000 | 180,000 | ||||
DR H.P INTEREST RECEIVED ACCOUNT CR
| 31.12.90 | H.P Trading | 36,000 | 31.12.90 | Debtors | 36,000 |
| 31.12.91 | H.P Trading | 27,000 | 31.12.91 | Debtors | 27,000 |
| 31.12.92 | H.P Trading | 15,300 | 31.12.92 | Debtors | 15,300 |
DR PROVISION FOR UNREALIZED PROFIT A/C CR
| 31.12.90 | Balance c/d | 30,000 | 31.12.90 | H.P Trading | 30,000 |
| 30,000 | 30,000 | ||||
| 31.12.91 | H.P Trading | 13,000 | 1.1.91 | Balance b/d | 30,000 |
| 31.12.91 | Balance c/d | 17,000 | |||
| 30,000 | 30,000 | ||||
| 31.12.92 | H.P Trading | 15,300 | 1.1.92 | Balance b/d | 17,000 |
| 31.12.92 | Balance c/d | 1,700 | |||
| 17,000 | 17,000 | ||||
| 1.1.93 | Balance b/d | 1,700 |
DR H.P TRADING ACCOUNT FOR THE YEAR ENDED CR
| 31.12.90 | cost of goods | 120,000 | 31.12.90 | sales | 180,000 |
| Provision for unrealized profit | 30,000 | H.P Interest | 36,000 | ||
| Gross profit | 66,000 | ||||
| 216,000 | 216,000 | ||||
DR H.P TRADING ACCOUNT FOR THE YEAR 1991 CR
| Gross profit | 40,000 | H.P interest | 27,000 | ||
| Provision for unrealized profit | 13,000 | ||||
| 40,000 | 40,000 | ||||
DR H.P TRADING ACCOUNT FOR THE YEAR 1991 CR
| Gross profit | 32,300 | H.P Interest | 15,300 | ||
| Provision for unrealized | 17,000 | ||||
| 32300 | 32300 | ||||
EXERCISE
Chaubuyu deals in motor vehicle. He sells motor vehicle on hire purchase basic. He sold two motor vehicles to Manumanu on 1st July 1998 for Tshs 80000. The cash price of these vehicles was Tshs 6500000. The payment was to be made as under deposit Tshs 200000. 24 monthly installment of Tshs 25000 each payable on lost day of every month. The company recognizes profit on Hire purchase sales in the year of sales but hire purchase interest apportioned on time basis. The financial year of Chaubuyu ends on 31 Dec each year.
Required
Record this transaction in the books of Chaubuyu carrying down the balances as on 31st Dec 1998.
- Hire purchase sales Account.
- Hire purchases Debtors Account.
- Hire purchases interest suspense Account.
Solution
H.P interest = total H.P price – cash price
= 800000 – 650000
= 150000
Monthly H.P. interest received = 150000 x 6
24
= 37,500
DR H.P DEBTORS ACCOUNT CR
| 1.7.98 | H.P sales | 650,000 | 31.12.98 | cash(deposit) | 200,000 |
| 31/12/98 | H.P interest rec. | 150,000 | 31.12.98 | (installment) cash | 150,000 |
| 31.12.98 | Balance c/d | 450,000 | |||
| 800,000 | 800,000 | ||||
| 1.1.99 | Balance b/d | 450,000 |
DR H.P SALES ACCOUNT CR
| 31.12.98 | H.P Trading | 650,000 | 1.7.98 | Debtors | 650,000 |
| 650,000 | 650,000 | ||||
DR H.P INTEREST SUSPENSE ACCOUNT CR
| 31.12.98 | H.P Trading | 37500 | 31.12.98 | Debtor | 150,000 |
| 31.12.98 | Balance c/d | 112500 | |||
| 150,000 | 150,000 | ||||
| 1.1.99 | Balance b/d | 112,500 | |||
SELLER’S BOOK:
- Small items
In this case the amounts involved (per item) are relatively small and the volume of such item is likely to be large.
Therefore no attempt is made to calculate the gross profit and H.P interest received for the separate crediting to the H.P Trading A/C. No calculations are made for each individual contract instead calculations are based on the total of all transactions of a particular accounting period involving a particular class of items under hire purchase, implying that pure gross profit and H.P interest are combined into one figure. This combined figure there is apportioned over the hire purchase period.
Method of recording / accounting
Alternative method is in use:
- Stock on hire method
- provision for unrealized profit method
- Stock on hire method
This method is so called due to the fact that goods on hire purchases in the customer’s hands are regarded as stock out on hire purchase contract at east.
Accounting entries
with the H.P selling price
with deposit and installments received
N.B
At the end of accounting period, the balance on the H.P debtors A/C represents sums owing (debtors owing) but not yet due.
Still at the end of the period, the following entries will be made:-
with cost of goods sold on H.P
With the equivalent amount of deposit installments received
H.P sales A/C the balance will be equal and opposite to that on H.P Debtor A/C.
H.P TRADING ACCOUNT
| Cost of goods sold | xx | Deposit+ installment | xx |
| stock on hire | xx | ||
| xxx | xxx | ||
The stock on hire (at cost) is calculated by using the following formula:
Stock on hire (at cost) =
The amount will then be credited to the H.P trading A/C and then carried down as a debit on the very A/C.
N.B
The balancing figure on H.P trading A/C represents pure gross forfeit and H.P interest earned during the period.
Example:
A business commenced selling electrical goods on H.P on 1st Jan 1990. During the 1st year goods cost was Tshs 15300 were sold for Tshs 26500. Deposit and installments received amounted to Tshs 13060. Prepares the appropriate ledger A/C using the stock on hire.
- Provision for unrealized profit method In this case provision is raised against gross profit included in the hire purchases debtors not yet due to reduce them to cost.
with the H.P selling price
With deposit and installments received
The balance on the H.P Debtors A/C at the end of the period represents sums owing on H.P contacts but not due still at the end of the period the following entries will be made.
with the cost of goods sold on hire purchase
with the transfer of balance on H.P sales A/C to H.P Trading
The provision for unrealized profit is raised against the profit and calculated by using the following formula.
This provision needs recalculations each period. The difference between the opening and closing balance shall be transferred to the hire purchases trading A/C.
Entry (on creating the prov.) = Dr H.P Trading A/C
CR; Provision for unrealized profit A/C
N.B
The balancing figure on the H.P trading A/C will then represent “pure gross profit plus hire purchase interest earned during the period”.
Examples
A business commenced selling electrical goods on H.P on 1st Jan 1990. During the 1st year goods cost was Tshs 15300 were sold for Tshs 26500. Deposit and installments received amounted to Tshs 13060. Prepare the appropriate ledger A/C using the provision for unrealized profit method.
DR H.P DEBTORS ACCOUNT CR
| H.P sales | 26500 | cash(deposit + installments | 13060 |
| Balance c/d | 13440 | ||
| 26500 | 26500 | ||
| Balance b/d | 13440 |
DR H.P SALES ACCOUNT CR
| H.P Trading | 26500 | H.P Debtors | 26500 |
| 26500 | 26500 | ||
DR H.P TRADING ACCOUNT FOR THE YEAR ENDED CR
| cost of goods | 15300 | H.P sales | 26,500 |
| Provision for unrealized Profit | 5680 | ||
| Gross profit | 5520 | ||
| 26,500 | 26,500 | ||
= 5680/=
EXERCISE
R.J commenced business on 1st Jan 2006. He sells refrigerators all of one standard type on hire purchase terms. The total amount including interest payable for each refrigeration is 1 Tshs 300. Customers are required to pay an initial deposit of Tshs 60, followed by eight quarterly installments of Tshs 30 each. The cost of each refrigerator to RJ is Tshs 200.
The following trial balance was extracted from RJ books as on 31 Dec 2006.
TRIAL BALANCE AS AT 31 DEC 2006
| Capital | 100,000 | ||
| Fixed assets | 10,000 | ||
| Drawings | 4000 | ||
| Bank overdraft | 19,600 | ||
| creditors | 16,600 | ||
| purchases | 180,000 | ||
| cash collected from customers | 76500 | ||
| Bank interest | 400 | ||
| wages and salaries | 12800 | ||
| General expenses | 5500 | ||
| 212,700 | 212,700 |
850 machines were sold on hire purchases terms during 2006. The annual accounts are prepared on the basis of taking credit for profit and loss Account for the year 2006 and balance sheet as on 31st Dec 2006.
Ignore depreciation of fixed assets.
Solution:
Deposit = 60 x 850 = 15000
Installment = 30 x 850 = 25500
76,500
Cost of goods = 200 x 850
= 170,000
Closing stock = 180000 = 900
200
900 -850= 50
50 x 200 = 10000
Selling price = 300 x 850
= 255000
EXERCISE
P.Q. ltd commenced business on 1st Jan 1997. They sell TV sets, all of one standard type on hire purchase terms. The hire purchases price (including interest) is shs 20000 for each TV set. The customers are required to pay shs 5000 an initial deposit, followed by twelve monthly installments of shs 1250 each. The cost of each TV sets PQ ltd is shs 14000.
The following trial balance was extracted from PQ ltd on dec 1997
| DEBIT | CREDIT | |
| Ordinary share capital | 1,500,000 | |
| Fixed Assets | 125,000 | |
| Purchases | 5,600,000 | |
| cash collected from customers | 4,500,000 | |
| wages and salaries | 150,000 | |
| General expenses | 50,000 | |
| Bank balance | 255,000 | |
| creditors | 180,000 | |
| 6,180,000 | 6,180,000 | |
400 TV sets were purchased during the year, but 260 tv sets were sold on hire purchase basis.
The annual accounts are prepared on the basis of taking credit for profit (including interest) in proportion to cash collected from customers.
Required:-
Prepare the hire purchase trading account and profit and loss A/C for year 1997 and a balance sheet as on 31st Dec 1997.
Solution:
Selling price = 20000 x 360
= 7,200,000
Closing stock = 14000 x (400 -360)
= 560,000
DR H.P DEBTORS ACCOUNT CR
| H.P sales | 7,200,000 | cash collected | 4,500,000 |
| Balance c/d | 2,700,000 | ||
| 7,200,000 | 7,200,000 | ||
| Balance b/d | 2,700,000 |
DR H.P SALES ACCOUNT CR
| H.P Trading | 7,200,000 | H.P Debtors | 7,200,000 |
| 7,200,000 | 7,200,000 |
DR H.P TRADING ACCOUNT AS AT 31ST DEC.1997 CR
| sales | 7,200,000 | ||
| purchases | 5,600,000 | ||
| less closing stock | 560,000 | ||
| cost of goods | 5,040,000 | ||
| provision for unrealized profit | 810,000 | ||
| Gross profit c/d | 1,350,000 | ||
| 7,200,000 | 7,200,000 | ||
DR PROFIT AND LOSS ACCOUNT CR
| wages and salaries | 150,000 | Gross profit b/d | 1,350,000 |
| General expenses | 50,000 | ||
| Net profit | 1,150,000 | ||
| 1,350,000 | 1,350,000 | ||
BALANCE SHEET AS AT 31ST DECEMBER 1997
| capital | 1,500,000 | Fixed Assets | 125,000 | ||
| Add; Net profit | 1,150,000 | 2,650,000 | Current Assets | ||
| stock | 560,000 | ||||
| current liabilities | |||||
| Creditors | 180,000 | Debtors
Less: Prov |
2,700,000 810,000 |
1,890,000 | |
| 2,830,000 | 2,830,000 |
REPOSSESSION
Sometimes the buyer of goods on hire may refuse to continue paying the installments. The seller may be permitted (having complied with some legal equipments) to repossess the goods. Both the deposit and installments received so far shall be retained by the seller.
Preferably, the transactions relating to the repossessed good are segregated from those transaction on hire purchases contract in the normal way hence the need to prepare repossession A/C in the seller books.
Entries
with outstanding installments on reposed goods
with unearned interest on repossessed goods
with profit on repossession
- The reserve entry made for the loss.
with H.P selling price of the repossessed goods
with deposit installed received on repossessed goods
- The valuation figure on the repossessed stock shall be credited to the repossession A/C and then being carried down as a debit ball on that A/C.
with the cost of reposed goods
DR REPOSSESSION ACCOUNT CR
| Cost | xx | Cash received | xx |
| Stock | |||
| xxx | xxx | ||
Example
Kitiorition commenced business on 1st April 1997. During the year ended 31st march 1998 purchases amounted to sh 10800 and ordinary sales to Tshs 12400. In addition the following sales were made under hire purchase agreements:-
| Article | Cost | sale price | Deposit paid | Monthly instal. | no. of instal.paid in year |
| Radiogram | 120 | 180 | 20 | 20 of Tshs.8 | 8 |
| Television | 160 | 240 | 24 | 12 of Tshs.18 | 2 |
| Refrigerator | 140 | 200 | 20 | 18of Tshs.10 | 4 |
Installments on the refrigerator could not be receipt and it was returned on 26 March and was unsold at 31 March. Stock in trade on 31st march excluding the returned refrigerator was valued at Tshs 1400.
You are required to;-
Prepare the H.P trading sales A/C, H.P. Debtors A/C Repossession A/C, H.P trading A/C and general trading A/C. Use stock on hire method.
Total cash collected; Radio = 20 + (8 x 8) = 84
= 98
T .V = 24 + (2 x 18) = 60
Refrigerator. = 20 +( 4 x 10) = 60
84+60+60 = 204
Outstanding Installment =(18-4) xTshs 10=140
DR H.P SALES ACCOUNT CR
| H.P Trading(204 – 60) | 144 | H.P Debtors | |
| H.P sales | 200 | ||
| Balance c/d | 276 | ||
| 620 | 620 | ||
DR REPOSSESSION ACCOUNT CR
| H.P Trading | 140 | H.P Debtors | 60 |
| H.P Trading( P & L) | 18 | stock c/d | 98 |
| 158 | 158 | ||
| stock b/d | 98 |
Exercise
Zamaradi ltd began business on 1st Jan 1995 for the year ended 31st Dec 1999 purchase of cars amounted to sh 16200. Cash sales of ware shs 200000, hire purchase sales were:-
| Type of car | cost price | sale price | Deposit rec. | Month instal. | instal.paid in year |
| Torgue | 3000 | 4000 | 400 | 12 of Tshs.300 | 7 |
| Helie | 2000 | 2800 | 400 | 15 0f Tshs.160 | 4 |
| Planet | 2500 | 3500 | 500 | 20 0f Tshs.150 | 8 |
| TOTAL | 7500 | 10300 | |||
The hire purchase of the planet returned the car on 20 Dec 1995 as he was unable to pay further installments.
Stock of car excluding repossessed car at 31st Dec 1995 were valued at Tshs 20000
Required to show:
- The hire purchase trading A/C
- The general trading A/C for the year ended 31 Dec 95
Solution
Value of repossess stock = 1800 x 2500 = 1,286
3600
Cash collected
Torgue = 400 + 7 x 300 = 2,500
Helie = 400 + 160 x 4 = 1,040
Planet = 500 + 150 x 8 = 1700
= 5240
Stock on hire
Tongue = 1600 x 3000 = 1125
4000
Helie = x 2000 = 1257
2800 2382
DR H.P TRADING ACCOUNT CR
| cost of goods | 7500 | cash collected | 5240 |
| stock on repossess | 1286 | ||
| stock on hire | 2382 | ||
| 8908 | 8908 |
DR GENERAL TRADING ACCOUNT CR
| purchases | 162,000 | sales | 200,000 |
| H.P Trading | 7500 | ||
| closing stock | 20,000 | ||
| 227,500 | 227,500 |
EXERCISE
- ltd deal in refrigerators. They sell refrigerators on cash basis and hire purchase basis. During the year ending 31st Dec 1998 they made the following transaction.
Purchases 500,000
Ordinary sale 550,000
H.P Sale 150,000
Cash received from H.P sales 81,000
Cost of goods sold on Hire purchase 100000
One refrigerators was repossessed due to non – payment of installments. The outstanding of installment of this refrigerator amounted to Tshs 3000 H.P. sale of this refrigerators was Tshs 7000 and cost Tshs 6000. Cash received against the refrigerator and H.P sale are included in the above figures. The company follows the stock system. There was no closing stock except repossessed refrigerator.
Required:
Prepare the following accounts for the year ending 31st Dec
- H.P Trading A/C
- General trading A/C
- Memorandum H.P. Debtors A/C
N.B: Stock system means using stock on hire purchase.
Solution
Stock repossession =
= 3000 x 6000
9000
= 2000
Stock on hire (cost = 66000 x (100,000 – 6000)
150,000 – 9000
= 66000 x 94000
141,000 = 44000
DR H.P TRADING ACCOUNT CR
| cost of goods | 100,000 | cash collected | 81,000 |
| Gross profit | 27,000 | stock on repossession | 2000 |
| stock on hire | 44,000 | ||
| 127,000 | 127,000 |
DR GENERAL TRADING ACCOUNT CR
| purchases | 500,000 | sales | 550,000 |
| Gross profit | 150,000 | H.P Trading | 100,000 |
| 650,000 | 650,000 |
DR MEMORANDUM H.P DEBTORS ACCOUNT CR
| H.P sales | 150,000 | cash collected | 81,000 |
| Outstanding install. | 3000 | ||
| Balance c/d | 66,000 | ||
| 150,000 | 150,000 |
EXERCISE.
On 1st Jan 1998 Mamujee acquired furniture on the hire purchase system from Babewana ltd, agreeing to pay four semiannual installments of Tshs 1600 each commencing on 30th June 1998. The cash price of the items was Tshs 6020 and interest of 5% per annum was chargeable.
On 30th Sept 1998, Mamujee expressed his inability to continue and Babewana ltd seized the property. Ti was agreed that Mamujee would pay the due proportion of the installment up to the date of seizure, and also a further sum of shs 400 towards depreciation. At the time of repossession, Babewana ltd valued the furniture at sh 3000
The company after incurring Tshs 400 towards repairs of the furniture sold the items for Tshs 3600 on 1st October 1998.
Prepare the ledger accounts in the books of the vendor and the purchases presuming that the purchases charges depreciation at 10% per annum.
Solution:
Workings
Cash price 6020
Add: ½ yr H.P interest 5/100 x 6020 x ½ 151
6171
Deduct: ½ yr installment 1600
4571
Add: ¼ yr H.P interest 5/100 x 4571 x ¼ 57
4628
Deduct install. + Dr (800 + 400) 1200
3428
VENDOR’S BOOKS.
DR H.P SALES CR
| H.P Trading | 6020 | 1.1.98 | Mamujee | 6020 | |
DR REPOSSESSION ACCOUNT CR
| 30.9.98 | Mamujee | 3000 | 15.10.98 | cash(sale proceeds) | 3600 |
| cash(repair) | 400 | ||||
| profit on sale to P & L | 200 | ||||
| 3600 | 3600 | ||||
Purchases book’s; Mamujee
DR FURNITURE ACCOUNT CR
| 1.1.98 | Babewana ltd | 6020 | 30.9.98 | Depr(6020×10/100×9/12) | 452 |
| 30.9.98 | Babewana | 5568 | |||
| 6020 | 6020 |
DR H.P INTEREST EXPENSE ACCOUNT CR
| 30.6.98 | Babewana ltd | 151 | P & L | 208 | |
| 30.9.98 | Babewana ltd | 57 | |||
| 208 | 208 | ||||
Cash price not given;-
In this case the cash price and H.P interest will be calculated by working backward.
Example
Kasum industries ltd acquired plant, delivered on Jan 1st 1995 on the following hire purchase terms.
- An initial payment of shs 40000 payable on or before delivery and.
- For half year payment of shs 30000 each commencing from June 30th 1995. In arriving at these term, the plant manufacturers computer interest at 6% per annum resume industries ltd provides depreciation at the rate of 8% on cost.
You’re required to show:-
The A/C in the books of tea Kasum industries ltd for the year ended 31st Dec 1995 and 31st Dec 1996 necessary to record the above transaction.
Cash price 150004
Less: deposit 40000
110004
Add H.P interest 100 x 11004 6600
116604
Deduct: installment 60000
56604
Add: H.P interest 6/100 x 56604 3396
60000
Deduct: installment 60000 NIL
DR PLANT ACCOUNT CR
DR H.P COMPANY ACCOUNT CR
DR H.P INTEREST ACCOUNT CR
|
EXERCISE
- Chaumbea co. Forward the piano to Bonge la Mshamba on system, the cost being shs 1000 and shs 2000 selling price. Payable in fifty monthly in stalemates of shs 40 each commencing from 31st aug. The sale take place on 1st aug 1991 the installment are regular paid. Accounts are drawn up on 31st Dec . on 1st October 1991 a similar sale is made to Mapua the cost price being shs 780, selling price shs 1040 payable in weekly installments of shs 20 commencing from the installment are paid regular. Show ledger a/c to the books of Chaumbea.
- H.P Sales A/C
- H.p memorandum A/C
- H.p. trading A/C
2) Damson ltd had purchases the machinery on hire purchase system from Hindu Mandali machinery tld. The terms are that they would pay shs 20000 down on 1st Jan 1993 and five annually installments of shs 11000 each commencing from 31st Jan 1994. They charged depreciation of machinery rate of 15% pe annum at diminishing balance system.
Hindu Mandal machinery ltd had charged interest a rate ate of 10%. Show the machinery A/C, and Hindu Mandal machinery ltd A/C to record the above transaction in books of Damson. Still the installment are paid off, Damson accounting year ends on 31st Dec.
| YEAR | AMOUNT DUE AT | INSTALLMENT | AMOUNT DUE AT | H.P INTEREST | THE AMOUNT DUE |
| ENDED | THE END OF THE YEAR | THE END OF YEAR | AT THE BEGINNING | ||
| 31.12.97 | – | 11,000 | 11,000 | 10,000 | |
| 31.12.96 | 10,000 | 11,000 | 21,000 |
19091 |
|
| 31.12.95 | 19091 | 11,000 | 30091 | 27355 | |
| 31.12.94 | 27355 | 11000 | 38355 | 34868 | |
| 31.12.93 | 34868 | 11000 | 45868 | 41698 | |
| 20000 | 61,698 |
Cash price 61698
Less: deposit 20000
41698
Add: H.P. Interest 10/100 x 41698 4169.8
45867.8
Deduct: installment 11000
34867.8
Add: H.P. interest 10/100 x 34867.8 3486.78
38354.58
Deduct; 2nd year installment 11000
27354.58
Working
31/8/91 provision for unrealized profit x 1,260 = 1,060
Cash collected = 5 x 40 = 200
1/10/91 —31/12/91 (14 weeks)
Cash collected = 14 x 20 = 280
200 + 280 = 480
DR H.P TRADING ACCOUNT CR
| cost of goods | 1780 | H.P sales | 3040 |
| prov.for unrealized profit | 1061 | ||
| Gross profit | 199 | ||
| 3040 | 3040 |
EXERCISE
On 1st Jan 1994 five trucks were purchase by Bonyoa on hire purchase terms. The cash price of each truck is shs 110,000. The payment was to be made has follows
10% of the cash price down
25% of the cash price at the end of each of the four installment half year
The payment due on 31st dec 1994 would not be made; the vendor allows Bonyoa to keep three trucks on the condition that the value of the other two tracks would be adjusted against the amount due the trucks being value at cost less 25% depreciation. This vendors or spend 1200 on parallel over haul the trucks and sell them for190, 000. Bonyoa charges repreciation ion at 15% p.a on original cost. And closing his books on 30 June each year.
You’re required to open necessary ledger in the books of both parties.
Solution:
Cash price for 5 tracks = 110,000 x 5 = 550,000
Down payment = 10/100 x 550,000 = 55,000
Installment paid = 25/100 x 55,000
= 220,000 – 55,000 = 165,000/=
Total H.P. Interest installment + deposit) – cash price
= [ (137,500 x 4) + 55000) ]- 550000
= 55,000
H.P. interest
Sum of the digit method
1 4 = 4/10 x 55,000 = 22,000
2 3 = 3/10 x 55,000 = 16,500
3 2 = 2/10 x 55,000 = 11,000
4 1/10 = 1/10 x 55,000 = 5,500
DR REPOSSESSION ACCOUNT CR
| H.P Debtor | 165,000 | sales | 190,000 |
| overhauling | 12,000 | ||
| profit on sales (P &L) | 13,000 | ||
| 190,000 | 190,000 |
Buyer’s book
DR TRUCK’S ACCOUNT CR
| 1.1.94 | Cash(Deposit) | 550,000 | 30.6.94 | Depreciation | 41250 |
| 30.6.94 | Balance c/d | 508750 | |||
| 550,000 | 550,000 | ||||
| 31.12.94 | Balance b/d | 508750 | 31.12.94 | Depreciation | 41250 |
| 31.12.94 | Repossession | 165,000 | |||
| 31.12.94 | P & L | 22,000 | |||
| 31.12.94 | Balance c/d | 280,500 | |||
| 508750 | 508,750 | ||||
| 1.01.1995 | Balance c/d | 250,500 |
| READ TOPIC 8 | |||
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