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
Deposit
(Down payment)
Outstanding Balance
(including HP interest
paid by instalments
Calculation of Hire Purchase

Interest
(a)
(b)
(c)
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
1
2
3
4
HP interest + Capital =
$
$
2000
800
2000
800
2000
800
2000
800
Instalments
$
2800
2800
2800
2800
B. Actuarial Method
Interest is charged on the outstanding

balance of the cash price after the down
payment is made.
1. Equal instalments
2. Unequal instalment
1 Equal instalment
Equal instament = HP price Down payment
No. of instalment
Example
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
(11096-1000)/4
Year
1
2
3
4
HP interest
6276
$
(9000-1000)*10%
=800
(8000+800-2524)*10%=628
(6276+628-2524)*10%=438
(4380+438-2524)*10%=230
4380
2096
Capital
$
1724
1896
2086
2294
8000
Instalments
$
2524
2524
2524
2524
10096
Unequal instalment
Unequal instalment=Cash price-Down payment+Interest accrued
No. of instalment
(i.e.unpaid interest)
Example
An asset is acquired on the following terms:

Cash price
$9000
Down payment
$1000
HP price
$11000
Interest
Four annual instament
$2000+interest
Year
1
2
3
4
HP interest
6000
$
(9000-1000)*10%
=800
(8000+800-2800)*10%=600
(6000+600-2600)*10%=400
(4000+400-2400)*10%=200
4000
2000
Capital
$
2000
2000
2000
2000
8000
Instalments
$
2800
2600
2400
2200
10000
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
2nd instalment
3rd instalment
4th instalment
$3600*4/10=$1440
$3600*3/10=$1080
$3600*2/10=$720
$3600*1/10=$360
Total HP interest =$13600-$10000=$3600

Sum of digit= 3*(3+1)/2=6
Case ( C )
Interest paid
1st instalment
2nd instalment
3rd instalment
4th instalment
$3600*3/6=$1800
$3600*2/6=$1200
$3600*1/6=$600
-
Concept Chart
Hire Purchase
Buyer
Assets
account
Hire purchase
creditors account
Hire purchase
interest suspense
account
Seller
Hire purchase
interest account
Hire purchase
sales
Provision
for unrealized
profit
Hire purchase
debtors account
Purchasers 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 purchasers books.
1. Progress interest charge system
2. Interest Suspense Method
They differ mainly in the way they record
hire purchase interest.
2 Method of HP Interest
Treatment
(i) Progress interest charge system
(ii) Interest suspense method
= 6 Version
* 3 method of HP Interest
Apportionment
(i) Straight-line method
(ii) Actuarial method
(iii) Sum-of-digit method
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
Cr HP Creditor
With hire purchase interest

accrued for the current year (at the
year end)
Dr Profit and Loss

(expense)
Cr HP Interest
With the amount of hire purchase

interest transferred to current
years 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
X
HP Creditor (Instalment for 2nd year)
Instalment for 2nd year Interest payable for 2nd year
Long term Liabilities
X
HP Creditor (Instalment for 3rd year and so on)
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
X
HP Creditor (Instalment for 2nd year)
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
X
Payable for 2nd year
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
31 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
31/12 Bank-instalment
1,000
2,524
31/12 Balance c/d
6,276
1/1/96 Vehicle
9,000
31/12 HP Interest
800
(9000-1000)*10%
9,800
9,800
Hire Purchase Interest

31/12/96 HP Creditor
800
31/12/96 P/L
800
Balance Sheet as at 31 Dec (Extract)

96
Fixed Assets
9000
Vehicle
Less Pro for Dep 900
8100
Current Liabilities
HP Creditor
1896
2524-628
Long Term Liabilities
4380
HP Creditor
6276-1896

1/1/96 Bank-deposit
1,000
2,524
31/12 Balance c/d
6,276
1/1/96 Vehicle
31/12 HP Interest
31/12 Balance
4,380
2,524
800
9,800
9,800
9,000
1/1/97 Balance b/d

31/12 HP Interest (6276*10%)
6,276
628
6,904
6,904

628
31/12/97 P/L
628

96
Fixed Assets
9000
Vehicle
8100
97
9000
1800
7200
Current Liabilities
HP Creditor
1896
2086
2524-438
2294
HP Creditor
4380
4380-2086

1/1/96 Bank-deposit
1,000
2,524
31/12 Balance c/d
6,276
1/1/96 Vehicle
31/12 HP Interest
31/12 Balance
4,380
31/12 Balance
2,524
1/1/97 Balance b/d

31/12 Hp Interest
6,276
628
6,904
6,904
2,524
2,294
800
9,800
9,800
9,000
1/1/98 Balance b/d

31/12 HP interest(4380*10%)
4,818
4,380
438
4,818

438
31/12/98 P/L
438

96
Fixed Assets
9000
Vehicle
8100
Current Liabilities
HP Creditor
1896
HP Creditor
4380
97
9000
1800
7200
98
9000
2700
6300
2086
2294
2524-230
2294
2294-2294

1/1/96 Bank-deposit
31/12 Balance c/d
31/12 Balance
4,380
31/12 Balance
1,000
2,524
6,276
9,800
1/1/96 Vehicle
31/12 HP Interest
2,524
1/1/97 Balance b/d

31/12 Hp Interest
6,276
628
1/1/98 Balance b/d

31/12 HP interest(4380*10%)
6,904
4,380
438
4,818
6,904
2,524
2,294
4,818
9,000
800
9,800
2,524 1/1/99 Balance b/d

31/12 HP interest(2294*10%)
2524
2294
230
2524

230
31/12/99 P/L
230

98
99
9000
2700
9000
3600
6300
5400
2086
2294
2294
97
96
Fixed Assets
9000
Vehicle
8100
9000
1800
7200
Current Liabilities
HP Creditor
1896
HP Creditor
4380
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 years
profit and loss account.
Dr Profit and Loss

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
31 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
= 11096 9000
= 2096
Equal instalments = (11096 1000)/4

=2524

1/1/96 Bank-deposit
31/12 Balance c/d
1,000
2,524
7572
9,800
1/1/96 Vehicle
1/1/96 HP Interest Suspense
(11096-9000)
9,000
2096
9,800
HP Interest Suspense
1/1/96 HP Creditor
31/12/96 HP Interest
2096
800
(9000-1000)*10%
31/12/96 Bal c/d
1296
2096
2096

31/12/96 HP suspense
800
31/12/96 P/L
800

96
Current Liabilities
HP Creditor
2524
Less HP interest suspense 628
1896
(7572-1296)*10%
7572-2524

5048
HP Creditor
1296-628
4380

1/1/96 Bank-deposit
31/12 Balance c/d
31/12 Balance c/d
1,000
2,524
7572
9,800
1/1/96 Vehicle
2,524
5048
6,904
1/1/97 Balance b/d
9,000
2096
9,800
7572
6,904
1/1/96 HP Creditor
2096
(9000-1000)*10%
31/12/96 Bal c/d
1/1/97 Bal b/d
2096
2096
1296 31/12/97 HP Interest
(7572-1296)*10%
31/12/97 Bal c/d
2096
800
1296
628
668
2096

628
31/12/98 P/L
628

96
97
Current Liabilities
2524
HP Creditor
2524
438
1896
2086
(5048-668)*10%
5048-2524
5048
HP Creditor
4380
668-438
2524
230
2294

1/1/96 Bank-deposit
31/12 Balance c/d
31/12 Balance c/d
31/12 Balance c/d
1,000
2,524
7572
9,800
1/1/96 Vehicle
9,000
2096
2,524
5048
6,904
2,524
2524
4,818
1/1/97 Balance b/d
7572
1/1/98 Balance b/d
6,904
5048
9,800
4,818
1/1/96 HP Creditor
2096
(9000-1000)*10%
31/12/96 Bal c/d
1/1/97 Bal b/d
2096
2096
1296 31/12/97 HP Interest
(7572-1296)*10%
31/12/97 Bal c/d
1/1/98 Bal b/d
2096
668
800
1296
628
668
2096
438
31/12/98(5048-668)*10%
Bal c/d
2096
230
2096

438
31/12/98 P/L
438

96
Current Liabilities
HP Creditor
2524
1896

5048
HP Creditor
4380
97
98
2524
438
2086
2524
230
2294
(2524-230)*10%
2524-2524
2524
230
2294
230-230

1/1/96 Bank-deposit
31/12 Balance c/d
31/12 Balance c/d
31/12 Balance c/d
1,000
2,524
7572
9,800
1/1/96 Vehicle
9,000
2096
2,524
5048
6,904
2,524
2524
4,818
1/1/97 Balance b/d
7572
1/1/98 Balance b/d
6,904
5048
9,800
4,818
2,524 1/1/99 Balance b/d
2524
2524
2524
1/1/96 HP Creditor
2096
(9000-1000)*10%
31/12/96 Bal c/d
1/1/97 Bal b/d
2096
2096
1296
(7572-1296)*10%
31/12/97 Bal c/d
1/1/98 Bal b/d
2096
668
1/1/99 Bal b/d
1296
628
668
2096
438
31/12/98(5048-668)*10%
Bal c/d
2096
230
800
230
2096
230
(5048-668)*10%

230
31/12/99 P/L
230

96
Current Liabilities
HP Creditor
2524
1896

5048
HP Creditor
4380
97
98
99
2524
438
2086
2524
230
2294
2524
230
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.
1.
Progress interest charge system
Summary of procedures
Dr HP creditor
Cr Bank
With the last payment to the HP

creditor
Dr HP interest
Cr HP creditor
With the HP interest and penalty

charges for early termination of the
hire purchase contract
Dr Disposal
Cr Asset
With the cost of the asset
Dr Provision for depreciation Transferring related depreciation

provision to the disposal account
Cr Disposal
Dr Bank
Cr Disposal
With the insurance claim for the

disposal (if any)
Dr Profit and Loss

Cr Disposal
With the loss on the disposal

(Reverse the entries for a profit on
disposal)
Example 7
Example
7
Cash Price
Prov for dep
$5000
$3200
( A full year dep is charged in the year of purchase, but none

in the year of disposal)
HP creditor on 1 Jan 1996

$1800
Instalments
$250(monthly)
Interest
$50
The car was involved in an accident in May 1996
resulting in a total write off, and the sum of $1000
was received from the insurnance company.
All instalments up to and including 31 May were
paid.
A payment of $930 was made on 30 June 1996 in
full settlement
HP Creditor
1996
$
1996
May 31 Bank instalment 1250 Jan 1 Bal b/f
Dec 31 HP interest
($250*5)
($50*6)
June30 Bank-settlement 930
Dec 31 HP interest
-penalty
2180
$
1800
300
80
2180
HP interest
1996
Dec 31 HP Creditor
(300+80)
$
380
1996
Dec 31 P/L
$
380
Disposal of Vehicle
1996
$
1996
Jun 30 Dep
Jun 30 Vehicle
5000
Jun 30 Bank
- insurance
Dec 31 P/L - loss
5000
Dep - Vehicle
1996
Jun 30 Disposal
$
1996
3200 Jan 1 B/f
$
3200
1000
800
5000
$
3200
Vehicle
1996
Jan b/f
$
5000
1996
Jun 30 Disposal
$
5000
2.
Interest suspense method

Dr HP Creditor
Cr Bank
With the last payment to the HP creditor
Dr HP interest
Cr HP interest suspense
With the HP interest for the current year
Dr HP Creditor
Cr Disposal
With any outstanding balance in the HP

creditor account
Dr Disposal
Cr HP Interest suspense
With any outstanding balance in the HP

interest suspense account
Dr Disposal
Cr Asset
With the cost of the asset
Dr Prov. for Depn.

Cr Disposal
Transferring the related depreciation

provision to the disposal account
Dr Bank
Cr Disposal
With the insurance claim for the disposal

(if any)
Dr Profit and Loss

Cr Disposal
With the loss on the disposal (Reverse the

entries for a profit on disposal)
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 1996
$2250
Instalments
$250(monthly)
Interest
$50
HP interest suspense
$450
The car was involved in an accident in May 1996 resulting in
a total write off, and the sum of $1000 was received from the
insurnance company.
All instalments up to and including 31 May were paid.
A payment of $930 was made on 30 June 1996 in full
settlement
HP Creditor
1996
$
1996
May 31 Bank instalment 1250 Jan 1
($250*5)
June30 Bank-settlement 930
Jun 30 Disposal
70
2250
1996
Dec 31 HP Creditor
1996
Jan 1 Bal/f
Bal b/f
HP interest
$
1996
Dec 31 P/L
300
$
2250
2250
$
300
$
1996
$
Jun 30 HP interest(60*5) 300
450
Jun 30 Disposal
150
450
450
Disposal of Vehicle
1996
$
1996
Jun 30 Dep
Jun 30 Vehicle
5000
Jun 30 HP interest
Jun 30 Bank
Suspense
150
- insurance
Jun 30 HP Creditor
Dec 31 P/L - loss
5000
$
3200
1000
70
880
5000
Include the penalty charge $80

For early termination of HP
Dep - Vehicle
1996
$
1996
Jun 30 Disposal
3200 Jan 1 B/f
1996
Jan b/f
Vehicle
$
1996
5000 Jun 30 Disposal
$
3200
$
5000
Sellers Book
2 Method of HP Interest
Treatment
(i) Profit Suspense Method
(ii) HP Interest Suspense Method
= 4 Version
* 3 method of HP Interest
Apportionment
(i) Straight-line method
(ii) Actuarial method
(iii) Sum-of-digit method
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:
1.
2.
3.
4.
5.
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.
Dr HP debtors
Dr HP Sales
With the cash selling price of the

sale.
Dr HP debtor
Cr HP interest suspense
With the total HP interest
Dr Bank
Cr HP debtors
With the deposit and installments

received
Dr HP interest suspense
Cr HP interest / P&L(income)
With the hire purchase interest

receivable for the current period
Dr HP Sales
Cr HP Trading
Transfer the HP sales to HP trading

account
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 31 Mar 1996
HP Debtors
1996
$
1996
Jan 1 HP Sales
Dec 31 Bank-instalment
($1200*2)
2400
($250*4*2)
Jan 1 Interest suspense 1600 Dec 31 Bal c/d
4000
(2000-1200)*2
Cash price
HP Sales
1996
$
1996
Dec 31 HP Trading 2400 Jan 1 HP Debtors
1996
$
1996
Dec 31 HP interest
Jan 1 HP Debtors
received
(2000-1200)*4/8*2 800
Dec 31 Bal c/d
800
1600
HP interest received
1996
$
1996
Dec 31 P/L
800 Jan 1 HP int suspense
$
2000
2000
4000
$
2400
$
1600
1600
$
800
Trading and profit and loss account for the year ended (Extract)
96
$
Sales (cash price)
2400
Less: cost of goods sold
2000
400
HP Gross profit
Add: HP interest received
800
96
$
Current Assets
2000
HP Debtors
800
Less Interest suspense
1200
1996
Jan 1 HP Sales
($1200*2)
HP Debtors
$
1996
2400
($250*4*2)
Jan 1 Interest suspense 1600 Dec 31 Bal c/d

(2000-1200)*2
4000
1997
Jan 1 Bal b/d
$
2000
2000
4000
1997
2000 Dec 31 Bank- instalment 2000
1996
$
1996
Jan 1 HP Debtors
Dec 31 HP interest
received
(2000-1200)*4/8*2 800
Dec 31 Bal c/d
800
1600
1997
1997
Dec 31 HP interest
800 Jan 1 Bal b/d
received
(2000-1200)*4/8*2
$
1600
1600
800
Interest received
1996
Dec 31 P/L
$
800
1996
$
Dec 31 HP interest suspense 800
96
97
$
$
$
$
Sales (cash price)
2400
2000
400
HP Gross profit
Add: HP interest received
800
800
96
$
Current Assets
2000
HP Debtors
800
Less Interest suspense
1200
97
$
-
B. Profit suspense method
The profit suspense method has the

following characteristics:
1. The hire purchase sale is recorded at the
hire purchase price.
2. The profit is recognized in proportion of
the amount collected.
3. The gross profit and the interest income
are not accounted for separately.
Summary of procedures:
Dr HP Debtors
Dr HP Sales
With the hire purchase price.
Dr Bank
Cr HP Debtors
With the deposit and instalments

received
Dr HP Sales
Cr HP Trading
Transfer the HP Sales to HP

Trading a/c
Dr HP Trading
Cr Provision for Unrealized
profit
With the increase in the provision

for unrealized profit.
*Transfer the unearned total
profit ( unearned HP profit &
unearned GP)
Dr Provision for Unrealized

profit
Cr HP trading
With the decrease in the

provision for unrealized profit.
* Transfer the unearned total
profit (unearned HP profit &
unearned GP)
Provision for unrealized profit
= Total Profit * instalments not yet received

HP price
= (HP price Cost) * Instalments not yet received

HP price
Example 10
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
31 Mar 1996
Required:
Account prepared according to the following assumptions:
(a) All instalments were received for the years ended 31 Dec
1996 and 1997
(b) All instalments were received for the years ended 31 Dec
1996 and 1997, except one in arrears as at 31 Dec 1996
which was received in 1997
(a)
HP Price
1996
Jan 1 HP Sales
($2000*2)
HP Debtors
$
1996
4000
($250*4*2)
Dec 31 Bal c/d
4000

1996
$
1996
Dec 31 Bal c/d
1000 Dec 31 HP Trading
($4000-2000)*2000/4000
$
2000
2000
4000
$
1000
96
$
$
Sales (HP price)
4000
2000
Less:Provision for unrealised
1000
profit
1000
Gross profit
96
Current Assets
2000
HP Debtors
Less Provision for unreaslised 1000
profit
1000
(a)
HP Price
1996
Jan 1 HP Sales
($2000*2)
1997
HP Debtors
$
1996
4000
($250*4*2)
Dec 31 Bal c/d
4000
1997
$
2000
2000
4000
Jan 1 Bal b/d

1996
$
1996
$
1000
Dec 31 Bal c/d
($4000-2000)*2000/4000
1997
$
1997
Dec 31 HP Trading
1000 Dec 31 Bal b/d
Dec 31 Bal c/d
0
($4000-2000)*0/4000 1000
$
1000
1000
96
97
$
$
$
$
Sales (HP price)
4000
Add: Decrease in prov.for unrealized
1000
profit
2000
Less:Increase Provision for
1000
unrealized profit
1000
Gross profit
96
$
Current Assets
2000
HP Debtors
Less Provision for unrealized 1000
profit
1000
1000
97
$
-
(b)
HP Price
1996
Jan 1 HP Sales
($2000*2)
HP Debtors
$
1996
4000
($250*4*2-250)
Dec 31 Bal c/d
4000

1996
$
1996
Dec 31 Bal c/d
($4000-2000)*2250/4000
$
1750
2250
4000
$
1125
96
$
$
Sales (HP price)
4000
2000
Less:Provision for unrealized
1125
profit
875
Gross profit
96
Current Assets
2250
HP Debtors
Less Provision for unrealized 1125
profit
1125
(b)
HP Price
1996
Jan 1 HP Sales
($2000*2)
1997
HP Debtors
$
1996
4000
($250*4*2-250)
Dec 31 Bal c/d
4000
1997
$
1750
2250
4000
Jan 1 Bal b/d

1996
$
1996
$
1125
Dec 31 Bal c/d
($4000-2000)*2250/4000
1997
$
1997
Dec 31 HP Trading
1125 Dec 31 Bal b/d
Dec 31 Bal c/d
0
($4000-2000)*0/4000 1125
$
1125
1125
96
97
$
$
$
$
Sales (HP price)
4000
Add: Decrease in prov.for unreasised
1125
profit
2000
Less:IncreaseProvision for
1125
unrealised profit
875
Gross profit
96
$
Current Assets
2250
HP Debtors
Less Provision for unreaslised 1125
profit
1125
1125
97
$
-
C. A combination of the 2 methods

The
combination of 2 methods has the

following characteristics:
1.The hire purchase sale is recorded at the
cash price.
2.The profit is recognized in proportion of
the amount collected.
3.The gross profit and the interest income
are accounted for separately.
4.Interest income is allocated over the
period of the hire purchase agreement on
a suitable basis
Dr HP debtors
Dr HP Sales
With the cash price.
Dr Bank
Cr HP debtor
With the deposit received
Dr Bank
Cr HP debtors
Cr Interest receivable
With the installments received.

With the capital part of the installments.
With the interest receivable for the current
period
Dr HP trading
Cr Provision for Unrealized
profit
With the increase in the provision for

unrealized profit. (Reverse the entries for a
decrease in the provision for unrealized
profit)
Provision for unrealised profit

= (Cash price Cost ) * Instalments not yet received
Cash Price
Example 11
Example 11

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
31 Mar 1996
Interest per instalment

= ($2000-1200)
8
= $100
Instalment =
$250
Capital
$150
Interest
+
$100
CashPrice
1996
Jan 1 HP Sales
($1200*2)
HP Debtors
$
1996
2400
($250-100)*4*2
Dec 31 Bal c/d
4000
HP Interest Receivable
1996
Dec 31 P/L
$
800
$
1200
1200
4000
1996
$
Dec 31 Bank ($100*4*2) 800

1996
$
1996
Dec 31 Bal c/d
($2400-2000)*1200/2400
200
96
$
$
Sales (cash price)
2400
2000
Less:Provision for unrealised
200
profit
200
HP profit
Add: Interest received
800
96
Current Assets
HP Debtors
1200
CashPrice
1996
Jan 1 HP Sales
($1200*2)
1997
Jan 1 Bal b/d
HP Debtors
$
1996
2400
($250-100)*4*2
Dec 31 Bal c/d
1200
1200
4000
4000
1200
1997
Dec 31 Bank- instalment 1200
HP Interest Receivable
1997
Dec 31 P/L
$
800
1997
$
Dec 31 Bank ($100*4*2) 800

1996
$
1996
Dec 31 Bal c/d
($2400-2000)*1200/2400
1997
$
1997
Dec 31 Bal b/d
Dec 31 HP Trading 200
Dec 31 Bal c/d
0
($2400-2000)*0/2400
200
200
$
200
200
96
97
$
$
$
$
Sales (cash price)
2400
Add: Decrease in prov.for unreasised
200
profit
Less:IncreaseProvision for
unrealised profit
Gross profit
Add: Interest Received
2000
200
200
800

96
$
Current Assets
1200
HP Debtors
200
800
97
$
-
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.
Dr Repossession
Cr HP Creditor
With the outstanding balance for the

particular HP debtors
Interest suspense method

Dr HP interest suspense
Cr Repossession
With the HP interest not yet received
Profit suspense method

Dr Provision for unrealized
profit
Cr Repossession
With the outstanding provision

transferred
The combined method

Dr Repossession
Cr interest Receivable
With the amount of accrued HP interest
Dr Trading
Cr Repossession
With the value of the repossessed item

which is taken back into stock
Dr Bank
Cr Repossession
With the insurance claim or any sale

proceeds for the repossessed item.
Dr Profit and loss

Cr Repossession
With the loss on the repossession

(Reverse the entries for a profit on
The value of the repossessed item

Cost
=
HP price
* Outstanding balance of the particular HP

debtor ( repossessed items)
(a) Using interest suspense method
Example 12 (a)

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
31 Mar 1996
All the instalments were received on the due dates,
except that payments on one of the items have been
default since 31 Mar 1997. The repossessed item has
been taken back into stock
HP Debtors
1997
$
1997
$
Jan 1 Bal b/d
2000 Mar 31 Repossession
1000
2000
2000
1997
$
1997
$
800
Mar 31 Repossession 400 Jan 1 Bal b/d
Dec 31 HP interest
400
received
Value of
800
800
(2000-1200)*4/8*1
Repossessed items
Repossession
1997
$
1997
$
Mar 31 HP Debtors 1000 Mar 31 HP int. suspense 400
($800-$400)
Dec 31 HP Trading
500
($1000*1000/2000)
Dec 31 P/L-loss on repossession 100
1000
1000
(b) Using profit suspense method
Example 12(b)

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
31 Mar 1996
All instalments were received on the due dates,
except that payments on one of the items have been
in default since 31 Mar 1997. The repossessed item
has been taken back into stock.
1997
Jan 1 Bal b/d
HP Debtors
$
1997
Dec 31 Bank- instalment
2000
Provision for unrealised profit
1997
$
1997
Mar 31 Repossession
500 Jan 1 Bal b/d
Dec 31 HP Trading
500
Dec 31 Bal c/d
(2000-1000)*0/2000
1997
Mar 31 HP Debtors
$
1000
1000
2000
$
1000
Value of
Repossessed items
800
800
Repossession
$
1997
$
1000 Mar 31 Prov. for unrealised
500
profit
(2000-1000)*1000/2000
Dec 31 HP Trading
500
($1000*1000/2000)
1000
1000
(c) Using the combined method
Example 12(c)
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
31 Mar 1996
1.
2.
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) 1997
Jan 1 Bal b/d
1997
Dec 31 P/L
HP Debtors
$
1997
Dec 31 Bank- instalment
($250-100)*4
1200
Interest receivable
$
1997
400 Dec 31 Bank ($100*4)
Value of
Repossessed items
$
600
600
1200
$
400
Repossession
1997
$
1997
$
Mar 31 HP Debtors 600 Dec 31 HP Trading
500
$1200-(250-100)*4
($1000*1000/1200)
Dec 31 P/L-loss on repossession 100
600
600
(2) 1997
Jan 1 Bal b/d
1997
Dec 31 P/L
HP Debtors
$
1997
$
1200 June30 Repossession
600
($250-100)*4
1200
1200
Interest receivable
$
1997
$
June 30 Repossession
200
600
($100*2)
Dec 31 Bank ($100*4)
400
Value of
600
600
Repossessed items
Repossession
1997
$
1997
$
June 30 HP Debtors 600 Dec 31 HP Trading
500
$1200-(250-100)*4
($1000*1000/1200)
June 30 Interest
200 Dec 31 P/L-loss on repossession 300
receivable
600
600
Hire Purchase Trading and

Profit and loss account
Interest suspense method and the

combined method
Hire Purchase Trading
Purchase
Add Repossession
Less closing stock
Cost of Goods sold
Gross profit
$
x
x
x
x
x
x
x
Sales cash price
$
x
Profit and Loss (Extract)

Loss on Repossession
$
x
HP profit
HP interest
Profit on Repossession
$
x
x
x
Profit suspense method

Hire Purchase Trading
Purchase
Add Repossession
Less closing stock
Cost of Goods sold
Provision for Unrealized profit
Gross profit
$
x
x
x
x
x
x
x
x
Sales HP price
$
x
Profit and Loss (Extract)

Loss on Repossession
$
x
HP profit
Profit on Repossession
$
x
x
ABC Ltd. Purchased a vehicle from Grace ltd. On Jan 1996

on hire purchase agreement. The details were as follows:
Cash price
$9,000
HP price
$11,096
Down payment
$1,000
Instalment
4 equal annual instalments
First due
Interest
31 December 1996
Depreciation
10% on cost
Using (a) the progress interest charge system and

(b) interest suspense method

Hire Purchase Accounts

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Hire Purchase Accounts

Uploaded by

Copyright:

Available Formats

Hire Purchase Accounts

Purchase (HP) is one of the

With Hire Purchase Agreement

HP selling price includes normal

Hire Purchase Price

+ Total Hire Purchase Interest

Calculation of Hire Purchase

Straight line method

Straight Line Method(Equal apportionment)

Interest is apportioned evenly over the

HP Interest per instalment

asset is acquired on the following

Interest is charged on the outstanding

An asset is acquired on the following terms:

An asset is acquired on the following terms:

C. Sum of Digits Method

HP interest is apportioned according

When n = number of instalments

A motor vehicle was purchased under a hire purchase

Total HP interest =$13600-$10000=$3600

Total HP interest =$13600-$10000=$3600

Acquisition of Assets on Hire Purchase

When an asset is acquired on hire

Progress interest charge system

is charged upon each instalment.

Progress interest charge system:

With cash price of assets (at the

With deposit and instalment paid

With hire purchase interest

Dr Profit and Loss

With the amount of hire purchase

Dr Profit and Loss

Annual depreciation charged on

Balance Sheet Presentation

instance: after 1st instalment Paid

instance: after 1st instalment Paid

ABC Ltd. purchased a vehicle from Grace Ltd. on 1

Equal instalments = (11096 1000)/4

Hire purchase Creditor (Grace Ltd)

31/12 Balance c/d

Hire Purchase Interest

Balance Sheet as at 31 Dec (Extract)

Hire purchase Creditor (Grace Ltd)

31/12 Balance c/d

1/1/97 Balance b/d

Hire Purchase Interest

Balance Sheet as at 31 Dec (Extract)

Hire purchase Creditor (Grace Ltd)

31/12 Balance c/d

1/1/97 Balance b/d

1/1/98 Balance b/d

Hire Purchase Interest

Balance Sheet as at 31 Dec (Extract)

Hire purchase Creditor (Grace Ltd)

1/1/97 Balance b/d

1/1/98 Balance b/d

2,524 1/1/99 Balance b/d

Hire Purchase Interest

Balance Sheet as at 31 Dec (Extract)

Interest Suspense Method

Interest is recorded all together at the

Interest Suspense Method:

With the cash price of assets