 DEFINITION

 Hire purchase, as a form of financing, in which the

hirer has the option to purchase the asset at the end
of the period on payment of the last instalment of
hire charge and the hire charges have two
components (a) interest charges (b) recovery of
principal.
 1. The payment is to be made by the hirer (buyer) to the hiree,
usually the vendor, in instalments over a specified period of time.
 2. The possession of the goods is transferred to the buyer
immediately.
 3. The property in the goods remains with the vendor (hiree) till the
last instalment is paid. The ownership passes to the buyer (hirer)
when he pays all instalments.
 4. The Hiree or the vendor can repossess the goods in case of default
and treat the amount received by way of instalments as hire charged
for that period.
 5. The instalments in hire purchase include interest as well as
repayments of principal.
 6. Usually, the hiree charges interest on flat rate.
ImportantTerms
For details of the following terms, please see my other presentation on
slideshare.net (Hire Purchase System Default and Repossession.
Hire Purchaser or Hirer
Owner or Hire Vendor
Depositor Initial Payment or Down Payment
Hire Charges
Cost Price
Cash Price
Hire Purchase Price
Hire Purchase Charges or Interest
Accounting for Hire Purchase
Transactions

Accounting Methods

For Goods of For Goods of

Considerable Value Small Value

Asset Hire Purchase Stock and

Asset Full Value
Accrual Trading A/c Debtors
Method
Method Method Method
Calculation of Interest
For recording hire purchase transactions for goods of
considerable value, calculation of interest is must.
In this presentation, various methods of calculation of
interest have been presented in simple and
understandable format.
Case 1: When Cash Price, down payment,
instalments and rate of interest are given
Example:
Cash Price = Rs. 37,230
Down payment = Rs. 10,000
Annual Instalments = 3 of Rs. 10,000 each
Rate of Interest = 5% p.a.
Year Outstanding Interest
Cash Price
1 Total CP 37,230
Less: DP (10,000)
5
27,230 27,230× = Rs. 1,362
100
Add: Interest 1,362
Less: Instalment 28,592
paid (10,000)
5
2. 18,592 18,592× = Rs. 930
100
Add: Interest 930
Less: Instalment 19,522
paid (10,000)
3. 9,522 478 = 10,000 – 9522
Add: Interest 478
Instalment paid 10,000
Case 2: When Cash Price, down payment and
instalments are given but rate of interest not
given.
Example:
Cash Price = Rs. 55,840, Down payment = Rs. 15,000
Annual Instalments = 3 of Rs. 15,000 each
Solution:
HPP = 15,000 + (15,000 *3) = 60,000
Total Interest = HPP – Cash Price
= 60,000 – 55840 = 4160
This interest shall be distributed among three years in
the ratio of outstanding instalments or Outstanding
HPP.
Yea Outstanding Ratio Interest
r HPP
𝟑
1 60,000 – 15,000 3 4,160× = Rs. 2080
=45,000 𝟔
𝟐
2. 45,000 – 15,000 2 4,160× = Rs. 1,387
=30,000 𝟔
𝟏
3. 30,000 – 15,000 1 4,160 × = 693
=15,000 𝟔
Total 6 4,160
Sam purchased machinery on hire purchase from Pam Ltd on
the following terms:
1) Cash Price = Rs.1,58,500
2) Cash Down payment =20%
3) Balance to be discharged in 4 equal instalments together
with interest @10%p.a be paid at the end of each year. You
are required to compute the payment of interest to be made
each year.
 PARTICULARS RS

CASH PRICE 158500

LESS :CASH DOWNPAYMENT

(158500 X 20%) 31700

BALANCE TO BE PAID AS 4TH INSTALLMENT 126800

YEAR 1 2 3 4 TOTAL
Discount
Factor @10% 0.909 0.826 0.751 0.683 3.169
Instalment p.a= Balance Amount
PVAF at 10% for 4th year

= 126800/3.17 =40000 p.a

Year Opening Interest loan Principal Closing
Balance 10% p.a Installment Amount Paid Balance
1 126800 12680 40000 27320 99480
2 99480 9948 40000 30052 69428
3 69428 6943 40000 33057 36371
4 36371 3629 40000 36371 0
Total 33200 160000 126800
40000-36371 3629
 Miss Anita bought a car on Hire purchase system
.The cash price is Rs.15,000 payable Rs 2000 as
down payment and 5 years instalment of Rs 3000
each at an interest rate of 5% p.a.
Year Opening Interest loan/DP Principal Closing
Balance 5% p.a Installment Amount Paid Balance
0 15000 Nil 2000 2000 13000
1 13000 650 3000 2350 10650
2 10650 533 3000 2468 8183
3 8183 409 3000 2591 5592
4 5592 280 3000 2720 2871
5 2871 129 3000 2871 0
TOTAL 2000 17000 15000
3000-2871 =2000
X1X2
9XX 129
 On January 1, 2018 a railway company buys on Hire
purchase system a truck or Rs.48,000 payable
Rs.12000 as down payment and three annual
instalment of Rs.12000 each combining principle
and interest the latter being at the rate of 5%p.a.
(P.V @5% Discount factor for 3 years = 2.72335)
.Calculate the interest.
INSTALLMENT = BALANCE AMOUNT TO BE PAID IN INSTALLMENT
ANNUITY FACTOR

INSTALLMENT = CASH PRICE - DOWN PAYMENT

ANNUITY FACTOR

12000 = CASH PRICE - 12000

2.72335

12000 X 2.72335 = CASH PRICE -12000

32,680 +12000 = CASH PRICE
CASH PRICE = 44680

OPENING BALANCE = CASH PRICE - DOWN PAYMENT

44680 -12000 = 32680
Year Opening Interest loan/DP Principal Closing
Balance 5% p.a InstallmentAmount PaidBalance
1 32680 1634 12000 10366 22314
2 22314 1116 12000 10884 11430
3 11430 570 12000 11430 0
Ram Ltd purchased a machine from Bharat Ltd on Hire
purchase system . Total cost of the machine was Rs 15,00,000
payable 20% down payment and four annual instalment of
Rs. 4,20,000 .Rs 3,90,000, Rs.3,60,000 and 3,30,000 at the end
of the first ,second ,third and forth year respectively.
Calculate interest included in each years instalments
assuming that sales were made at the beginning of the year.
HIRE PURCHASE PRICE =DOWN PAYMENT - INSTALLMENT
=300000 + (420000+390000+360000 + 330000)
=3000000 +1500000
=1800000

TOTAL INTEREST = HIRE PUCHASE PRICE -CASH PRICE

=1800000-1500000

=3000000
 Year Opening (Q/S HP) loan/DP O/S BAL AT
Balance Installment END
1 1500000 420000 1080000
2 1080000 390000 690000
3 690000 360000 330000
4 330000 330000 0

RATIO = 150000 : 1080000: : 690000 :330000

50 :36 : 23 :11
YR
1 50/120 X 300000 125000
2 36/ 120 X 300000 90000
3 23/120 X 300000 57500
4 11/120 X 300000 27500
300000
Year INSTALLMENT PRINCIPLE INTEREST
0 300000 300000 0
1 420000 295000 125000
2 390000 300000 90000
3 360000 302500 57500
4 330000 302500 27500
1800000 1500000 300000
 ABC company limited is faced with two options as under in respect of acquisition of
an asset value of Rs.100000.
 1)To acquire the asset directly by taking a bank loan of Rs.1,00,000 repayable in
five years instalments and at 15% interest rate.
 2) To lease the asset rentals of Rs. 350 per 1,000 of the asset value for five years
table at year end.
 The following additional information are available :
 The rate of depreciation of the asset is 15% WDV.
 The company has an effective tax rate of 30%.
 The company employs a discounting rate of 16%.
 You are supposed to report which option is more preferable to the company restrict
calculation over a period of 10 years .
 FIRST OPTION ;HIRE PURCHASE

PRINCIPLE AMOUNT = 100000 = 20000p.a

5
Interest = 15%
100000/5 = 20000 p.a
LOAN AMORTIZATION SCHEDULE
Year Opening Interest loan/DP Principal Closing
Amount
Balance 15% p.a Instalment Paid Balance
1 100000 15000 20000 35000 80000
2 80000 12000 20000 32000 60000
3 60000 9000 20000 29000 40000
4 40000 6000 20000 26000 20000
5 20000 3000 20000 23000 0
COST 100000 DEP FOR TEN YEARS
DEP 15000 100000 X 15%
85000
DEP 12750 85000 X 15%
72250
DEP 10838 72250 X 15%
61413
DEP 9212
52201
DEP 7830
44371
DEP 6656
37715
DEP 5657
32058
DEP 4809
27249
DEP 4087
23162
DEP 3474
 HIRE PURCHASE IS FOR TEN YEARS

Year INTEREST DEPRECIATION TOTAL TAX NET INSTALLMENT NET DISCOUNT PRESENT
EXP 30% SAVINGS CASH FLOW FACTOR VALUE
1 15000 15000 30000 9000 21000 35000 -14000 0.862 -12068
2 12000 12750 24750 7425 17325 32000 -14675 O.743 -10904
3 9000 10838 19838 5951 13887 29000 -15113 0.641 -9688
4 6000 9212 15212 4564 10648 26000 -15352 0.552 -8474
5 3000 7830 10830 3249 7581 23000 -15419 0.476 -7339
6 6656 6656 1997 4659 4659 0.410 1910
7 5657 5657 1697 3960 3960 0.354 1402
8 4809 4809 1443 3366 3366 0.305 1027
9 4087 4087 1226 2861 2861 0.263 752
10 3474 3474 1042 2432 2432 0.227 552
NET CASH P.V -42830
 YEARS AMOUNT P.V PV
PV 0.862
DISCOUNT
FACTOR 16%
O.743
LEASE RENT 1 TO 5 YEARS 35000 3.274 114590

LESS :TAX @ 0.641

30% 1 TO 5 YEARS 10500 3.274 34377
24500 3.274 80213 0.552
NET CASH
OUTFLOW 0.476

80213 TOTAL 3.274

 Ril has an investment plan Rs.216 lakhs .Marginal cost of capital is 10% .The rate
of tax is 35%
 It is examining the financing alternatives for the capital expenditure . The
company received a proposal from Bajaj Finance Ltd. The proposal is under its
consideration . The following proposal has the following terms:
 A) HIRE PURCHASE
 1. Rate of interest 16%
 2. 3 equal instalments
 3. Down payment is 20%
 4. Depreciation as per SLM.
 B) LESING
 1) Lease Rentals are payable @ 72.58 lakhs p.a
 2) Primary lease period 5 years
 3) Net salvage value after 3 years is Rs.66 lakhs
 Help RIL Ltd in taking a decision
 INSTALLMENT 172.8/3 = 57.6
INTEREST CALCULATION

Year CASH PRICE PRINCIPLE INTEREST INSTALMENT

I 216

DOWN PAYMENT 43.2

172.8 57.6 27.648 85.248
II 57.6
115.2 57.6 18.432 76.032
III 57.6
BALANCE 57.6 57.6 9.216 66.816
172.8 55.296 228.096
 216 X COST- SALVAGE
20% = 43.20 Dep /LIFE
=150/3
50

DOWNPAY PRINCPAL TAX ON TAX ON NET CASH PV

YEAR MENT PAID DEP INTEREST INTEREST FLOW FACTOR PV

0 43.20 57.6 17.5 27.65 9.68 101.27 0.909 92.05

1 57.60 17.5 18.43 6.45 52.08 0.826 43.02

2 57.60 17.5 9.22 3.23 46.09 0.751 34.61

3 169.68
 YEARS AMOUNT P.V PV

DISCOUNT FACTOR
10%

LEASE RENT 1 TO 3 YEARS 72.58 2.486 180

LESS :TAX @
35% 1 TO 3 YEARS 25.40 2.486 63

47.18 2.486 117.28

NET CASH OUTFLOW

PV

117.28
0.909 + 0.826 + 0.751 =2.486
Hi-Fi Builders Ltd needs to acquire the use of a crane for its
construction business. The crane if purchased outright will cost
Rs.10,00,000. A hire purchase and leasing company has offered the
following two alternatives :
Hire Purchase :
Rs.2,50,000 will be repayable on signing of the agreement . Three
annual instalments of Rs.4,00,000 will be payable at the end of each
year starting from year one. The ownership in the crane will be
transferred automatically at the end of the third year. It is assumed that
the company will be able to claim depreciation on straight line basis
with zero salvage value.
Leasing :
RS.20,000 will be payable towards initial service fee upon signing of
the lease agreement . Annual lease rent of Rs.4,32,000 is payable at the
end of each year starting from first ,for a period of three years.
 OPTION I
DEP 1000000/3 333333.33

Year INSTALMENT INTEREST CASH PRICE DEPRECIATION

0 250000 0 250000
1 400000 225000 175000 333333.333
2 400000 150000 250000 333333.333
3 400000 75000 325000 333333.334
1450000 450000 1000000 1000000.00

INTEREST HIRE PURCHASE PRICE- CASH PRICE

1450000 -1000000 = 450000
RATIO 03:02:01
 WORKING NOTE
IN NEXT SLIDE NET CASH PV
Year Instalment FLOW FACTOR PV OF
TAX 30%
0N
INTEREST/DEP 20% OUTFLOW
0 250000 250000 1.0000 250000
1 400000 195417 204583 0.8333 170479
2 400000 169167 230833 0.6944 160290
3 400000 142917 257083 0.5787 148774
729543
 WORKING NOTE
 TAX SAVING = DEP + INTEREST
 =225000 +333333 = 583333 X 35% =195417
 =150000 + 333333 = 169167
 =75000 +333333 =408333 X 35% = 142917
 INSTALMEN TAX 35% ON LEASE NET CASH PV OF CASH
YEARS T RENT FLOW PV 20% FLOW

0 20000 0 20000 1 20000

1 432000 158200 273800 0.8333 228157.54

2 432000 151200 280800 0.6944 194987.52

3 432000 151200 280800 0.5787 162498.96

PV OF NET CASH FLOW 605644.02

(20000 + 432000) X = 158200

35%