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Study Note 2.2 Page (80-113)

Study Note 2.2 Page (80-113)

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Published by: s4sahith on Dec 17, 2009
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Financial Accounting
80
ROYALTY AND HIRE PURCHASE
2.2
HIRE-PURCHASE AND INSTALLMENT PURCHASE SYSTEMS
HIRE-PURCHASE SYSTEMINTRODUCTION
It is not always possible by a purchaser to meet up the higher demand for goods due toimmediate cash payment. To meet this demand the concept of Hire purchase is very popularin the market.Under this system the purchaser
(Hirer)
pays the entire amount in staggered way viz. monthly,quarterly or yearly with some interest. Under this system the goods are sold with the follow-ing conditions.Possession of goods is delivered to a hirer but the title to the goods (Ownership) are trans-ferred only when the agreed sum( Hire Purchase price) is paid by the hirer.Such hirer has a right to terminate the agreement at any time before the property so passes.That means he has the option to return the goods in which case he need not pay installmentsfalling due thereafter. However, the hirer cannot recover the sums already paid as such sumslegally represent hire charges of the goods in question.The hire-purchaser, during that period of possession of goods, cannot damage, destroy, pledgeor sell such goods. He is supposed to take all such care of goods as a prudent person does in hisown goods.In case of Installment sale, it is not only the possession of goods but also the
ownership
in goodsis transferred to the buyer immediately at the time of agreement.Further. in installment system if the buyer stops the payment of dues, then He does not havethe right of seizing his goods. The differences between installment sale and hire-purchase areas below:
ParticularsHire PurchaseInstallment sale
OwnershipStipulates the time at which theOwnership passes at theownership passes to the buyer. It istime of Saleusually on the payment of lastinstallmentDefault in makingSeller can repossess the goods. In thatSeller does not have anypayment case the installment so far paid isother right except the righttreated to be Hiring charges.of suing the buyer for thenon-payment of price.Right of sale orNo right to sale or otherwise transferRight to sale or otherwiseother wisethe goods since the legal position oftransfer the goodsthe hirer is bailee.Loss ot damages toAny loss occurring to goods has to beAny loss occurring to goodsthe goods. borne by the seller if the buyer takeshas to be borne by the buyer.reasonable care.
 
81
Financial Accounting
SITUATION – I : WHEN RATE OF INTEREST, TOTAL CASH PRICE AND IN-STALLMENTS ARE GIVENIllustration 1 :
X purchases a car on hire-purchase system on 1.1.07. The total cash price of thecar is Rs. 4,50,000 payable Rs. 90000 down and three installments of Rs. 1,70,000, Rs. 1,50,000and Rs. 1,08,460 payable at the end of first, second and third year respectively. Interest is chargedat 10% p.a.You are required to calculate interest paid by the buyer to the seller each year.
Solution:
Following table is useful for calculating interest paid with each installment:
SITUATION – II : WHEN RATE OF INTEREST AND INSTALLMENTS ARE GIVEN BUTTOTAL CASH PRICE IS NOT GIVEN.Illustration 2 :
X purchased a T.V on hire-purchase system. As per terms he is required to pay Rs. 3000 down,Rs. 4000 at the end of first year, Rs. 3000 at the end of second year, and Rs. 5000 at end of thirdyear. Interest is charged at 12% p.a.You are required to calculate total cash price of T.V and interest paid with each install ment.Solution:
Analysis of Instalments
YearOpening BalanceInstalementsPaymentPaymentClosingof Cash Priceto wardstowardsBalance 0Principal /CashInterestCash PricePriceRs.Rs.Rs.Rs.Rs.01.01.084,50,00090,00090,000-3,60,00031.12.083,60,0001,70,0001,34,00036,0002,26,00031.12.092,26,0001,50,0001,27,40022,60098,60031.12.1098,6001,08,46098,6009,860-
 
Financial Accounting
82
ROYALTY AND HIRE PURCHASESITUATION – III: -WHEN ONLY INSTALLMENTS ARE GIVEN, BUT CASH PRICE ANDRATE OF INTEREST ARE NOT GIVEN.Illustration 3 :
X & Co. purchased a Motor car on April 1, 2007 on hire-purchase paying Rs. 60,000 cash downand balance in four annual installments of Rs. 55,000, Rs. 50,000.,Rs. 45000 and Rs. 40,000 eachInstallment comprising equal amount of cash price at the end of each accounting period. Youare required to calculate total cash price and amount of interest in each Installment.
Solution:
Hire-purchase PriceDown Payment60,0001st installment55,0002nd installment50,0003rd installment45,0004th installment40,000Total2,50,000As each installment comprises equal amount of cash price the differences in installment amountsare due to interest amount only. Assuming X is the amount of Cash Price in each installmentand I is the amount of interest.
Calculation of Cash PriceAnalysis of Instalments
InstamentInterstCash PriceRs.Rs.Rs.3rd Instalment(-) Interest (12/112 x 5,000)5,0005365364,464Balance of Cash Price4,464(+) 2nd Instalment3,0007,464(-) Interest (12/112 x 7,464)8008002,200Balance of Cash Price6,664(+) 1st Instalment4,00010,664(-) Interest (12/112 x 10,664)1,1431,1432,857Balance of Cash Price9,521(+) Down Payment3,000-3,000Total Cash Price12,521247912,521

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