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CHAPTER – 7
HIRE PURCHASE & INSTALMENT SYSTEM

TABLE OF CONTENTS
1. Distinction between HP & Installment 2. Hire Purchase System
3. Installment System 4. Presentation of Asset A/c in BS of Purchaser
5. Acc. Entries For Hire Purchase Transaction 6. Repossession of Goods under HP System
7. Practical Problems

1. DISTINCTION BETWEEN HIRE PURCHASE AND INSTALLMENT

POINT OF
HIRE PURCHASE SYSTEM INSTALLMENT SYSTEM
DIFFERENCE
It is governed by Hire Purchase Act, 1972. Governing Act It is governed by Sale of Goods Act, 1930.
Nature of
It is an agreement of hiring. It is an agreement of sale.
Contract
The parties involved are called Hirer and The parties involved are called buyer and
Parties Involved
Hire vendor. seller
Ownership is transferred on payment of last Transfer of Ownership is transferred on date of
installment. Ownership delivery, like normal sale.
Right of The seller can sue for price if the buyer is
The seller may take possession of the goods
Repossession by in default. He cannot take possession of
if hirer is in default.
Seller the goods.
Hirer cannot hire out sell, pledge or assign
The buyer may dispose off the goods and
entitling transferee to retain possession as Right of Disposal
give good title to the bona fide purchaser.
against the hire vendor.
The hirer is not responsible for risk of loss
The buyer is responsible for risk of loss of
of goods if he has taken reasonable Responsibility
goods because of the ownership has
precaution because the ownership has not for Risk of Loss
transferred.
yet transferred.
Component other than Cash Price included Component Component other than Cash Price included
in installment is called Hire charges. other than Cash in Installment is called Interest.

2. HIRE PURCHASE SYSTEM

MEANING:
Under the Hire Purchase System, the Hire Purchaser gets possession of the goods at the outset and can use it,
while paying for it in instalments over a specified period of time as per the agreement. However, the ownership
7. 1

of the goods remains with the Hire Vendor until the hire purchaser has paid all the instalments. Each instalment
paid by the hire purchaser is treated as hire charges for using the asset. In case he fails to pay any of the
instalments (even the last one) the hire vendor has the right to take back his goods without compensating the

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buyer, i.e., the hire vendor is not going to pay back a part or whole of the amount received through instalments
till the date of default from the buyer.

UNDERSTANDING CERTAIN TERMS:

1. Hire Vendor: Hire vendor is a person who delivers the goods along with its possession to the hire
purchaser under a hire purchase agreement.
2. Hire Purchaser: Hire purchaser is a person who obtains the goods and rights to use the same from hire
vendor under a hire purchase agreement.
3. Cash Price: Cash price is the amount to be paid by the buyer on outright purchase in cash.
4. Down Payment: Down payment is the initial payment made to the hire vendor by the hire purchaser at
the time of entering into a hire purchase agreement.
5. Hire Purchase Instalment: Hire purchase instalment is the amount which the hire purchaser has to pay
after a regular interval upto certain period as specified in the agreement to obtain the ownership of the
asset purchased (on payment of the last installment) under a hire purchase agreement. It comprises
of principal amount and the interest on the unpaid amount.
6. Hire purchase price: It means the total sum payable by the hire purchaser to obtain the ownership
of the asset purchased under hire purchase agreement. It comprises of cash price and interest on
outstanding balances.

SALIENT FEATURES OF HIRE PURCHASE SYSTEM:

• The hire vendor transfers only possession of the goods to the hire purchaser immediately after the
contract for hire purchase is made.
• The goods are delivered by the hire vendor on the condition that a hire purchaser should pay the amount
in periodical instalments.
• The hire purchaser generally makes a down payment, i.e., an amount on signing the agreement.
• Each instalment consists of two elements- finance charge (interest on unpaid amount) and capital
payment.
• The property in goods is to pass to the hire purchaser on the payment of the last instalment and
exercising the option conferred upon him under the agreement.
• In case of default in respect of payment of even the last instalment, the hire vendor has the right to
take the goods back without making any compensation.

SPECIAL TERMS:
i) Cash Price: A price by which goods are purchased or sold in the market on cash terms. This price is also
known as ‘Cash down Price.’
ii) Hire purchase price: A price payable by the buyer to seller under H.P. agreement.
iii) Instalment price: A price payable by the buyer to the seller under Instalment agreement.
iv) Cash down: A sum payable as initial payment towards hire purchase/Instalment price by the buyer to the
seller on signing of the agreement.
v) Loading: A difference between hire purchase price and cost price. Loading is not accounted for.
vi) Interest: A compensatory payment by a buyer to a seller for delay in payments.
vii) Profit: Margin of the seller added to the cost price to arrive at selling price
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MAGIC BOX AND FORMULAE
A. From Vendors Point of View:
MAGIC BOX
Cash Down
Cost Price Cost Price Instalment 1
Hire Purchase Cash Price
Instalment 2
Price
Profit Instalment 3
Loading
Interest Interest Instalment 4

i. Hire Purchase / Instalment Price = Cash Price + Interest or

= Cost Price + Profit + Interest or
= Cost Price + Loading or
= Cash Down + Instalments

ii. Cash Price = Hire Purchase Price - Interest or

= Cost Price + Profit

iii. Interest = Hire Purchase/ Instalment Price - Cash Price or

= Loading - Profit

iv. Cost Price = Cash Price - Profit or

= Hire Purchase / Instalment Price - Loading

v. Profit = Cash Price - Cost Price or

= Loading - Interest

vi. Loading = Profit + Interest or

= Hire Purchase Price - Cost Price

vii. Cash Down = Hire Purchase Price - Instalments

viii. Instalments = Hire Purchase Price - Cash Down

B. From Buyers Point of View:

MAGIC BOX
Cash Down
Cost Price Instalment 1
Hire Purchase
Instalment 2
Price
Instalment 3
7. 3

Loading
Instalment 4

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i. Hire Purchase / Instalment Price = Cash Price + Interest or
= Cost Price + Interest or
= Cash Down + Instalments

ii. Cash Price = Hire Purchase / Instalment Price - Cash Price

iii. Interest = Hire Purchase / Instalment Price - Cash Price or

= Hire Purchase / Instalment Price - Cost Price

iv. Cash Down = Hire Purchase / Instalment Price - Instalments

v. Instalments = Hire Purchase / Instalment Price - Cash Down

NOTE: Interest is dependent on the following factors -

i) Outstanding principal sum
ii) Period of outstanding
iii) Rate of interest

Example 1: Determination of Hire Purchase Price

On 1st April, 2019 X purchased a machine on the hire purchase system the cash price being Rs. 11,000.
Payment was to be made Rs. 3,000 down and the balance in 4 annual Instalments of Rs. 2,000 each plus
interest. Interest is chargeable @ 10% p.a.

Principal sum Principal sum

Interest 10% Gross Instalment
outstanding at the outstanding at
Instalment p.a. amount paid
beginning the end
Rs. Rs. Rs.
Rs. Rs.
1 2 3 4 = (2+3) 5 6 = (4- 5)
Cash down 11,000 Nil 11,000 3,000 8,000
1st 8,000 800 8,800 2,800 6,000
2nd 6,000 600 6,600 2,600 4,000
3rd 4,000 400 4,400 2,400 2,000
4th 2,000 200 2,200 2,200 Nil
Total 2,000 13,000
Hire Purchase Price is Rs. 13,000

Example 2: Determination of Hire Purchase Price

On July 1st, 2018 Robin & Company purchased a Machine from Mumbai Machine Company on Instalment
basis. The cash price of the machine was Rs. 20,000. The payment was to be made Rs. 5,000 on the date of
contract i.e. July 1st, 2018 and the balance in 3 annual Instalments of Rs. 5,000 plus interest at 12% p.a.
payable to March, 31st each year, the first Instalment being payable on March 31st, 2019.
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Interval in Principal sum
Interest Principal
between two Outstanding at Gross Instalment
@ sum at
Instalment Instalments the amount paid
12% p.a. the end
(Months) beginning Rs. Rs.
Rs. Rs.
Rs. Rs.
1 2 3 4 5 = (3 + 4) 6 7 = (5 - 6)
Cash down - 20,000 Nil 20,000 5,000 15,000
1st 9 15,000 1,350 16,350 6,350 10,000
2nd 12 10,000 1,200 11,200 6,200 5,000
3rd 12 5,000 600 5,600 5,600
Total 3,150 23,150
Hence, Hire Purchase Price is Rs. 23,150.

Example 3: Determination of Cash Price

On January 1st, 2019 Mumbai Printers Limited purchased a Printing Machine on a hire purchase basis,
payment to be made as Rs.10,000 on the said date and the balance in 3 half - yearly Instalments of Rs.
8,200, Rs. 7,440 and Rs. 6,300 commencing from June 30th, 2019. The vendor charged interest at 10% p.a.
calculated on half - yearly rests.
Principal sum Principal sum
Interest 5/105
outstanding Gross outstanding
Instalment of gross
Instalment at the amount at the
Rs. amount
end Rs. beginning
Rs.
Rs. Rs.
1 2 3 4 = (2+3) 5 6 = (4-5)
3rd Nil 6,300 6,300 300 6,000
2nd 6,000 7,440 13,440 640 12,800
1st 12,800 8,200 21,000 1,000 20,000
Cash down 20,000 10,000 30,000 Nil 30,000
Total 31,940 1,940
Cash Price is Rs. 30,000

3. SALIENT FEATURES OF INSTALMENT SYSTEM

i. Instalment price includes interest

ii. Instalment price is payable in Instalments
iii. The title of the property in the goods is transferred to the purchaser immediately on signing the contract.
iv. Even-though the buyer failed to make the payment of any instalment, the vendor has no right of
repossession of goods. However, the vendor has a remedy to sue the purchaser for the due instalments.
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4. PRESENTATION OF ASSET ACCOUNT IN THE BALANCE SHEET OF A PURCHASER

1. Hire Purchase System Rs.

Cost ...........
Less: Depreciation upto last year .........
Depreciation for the year ......... ______
Written Down Value ______
Note: Amount due to Hire Vendor is shown separately as a liability.

2. Instalment system Rs.

Cost ...........
Less: Depreciation upto last year .........
Depreciation for the year ......... ______
Written Down Value ______
Note: Amount due to vendor is shown as liability (Net of Balance in Interest Suspense A/c)

5. ACCOUNTING ENTRIES FOR HIRE PURCHASE TRANSACTION

METHODS OF ACCOUNTING H.P.

IN BOOKS OF HIRE-PURCHASER

CASH PRICE INTEREST SUSPENSE

METHOD METHOD

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CONCEPTUAL FRAMEWORK UNDER AS 19 IN BRIEF:
Finance lease in financial Statement of lessee
• Recognise the Asset taken on lease as an asset and show liability towards vendor at the inception of the
lease.
• Record asset and liability at lower of fair value of asset at inception of lease or present value of minimum
lease payments.
• Apportion lease payments between finance charge and reduction of outstanding liability.
• Provide depreciation as per AS 6.

Finance Lease in financial Statement of lessors

• Seller Lessor (Lessor has manufactured asset as well as he is doing financing).
• Recognise sale transaction in profit and loss account as per outright sales policy of the enterprise.
• Recognise fair value of asset or PV of Minimum Lease payments as receivable.
• Recognise finance income in profit and loss account.
• Ensure constant periodic return on the net investment of the lease outstanding.
Sr. BOOKS OF PURCHASER
Transaction
No. Cash Price Method Interest Suspense Method
1. Purchase of an assets Asset A/c......Dr. Asset A/c..................Dr.
To Hire Vendor A/c. (Cash Price)
(Cash Price) Interest Suspense A/c......Dr.
(Total Interest)
To Vendor’s A/c.
(Instalment Price)
2. Cash Down Hire Vendor’s A/c......Dr. Vendor’s A/c...............Dr.
To Bank A/c. To Bank A/c.
3. Interest accrued upto Interest A/c...........Dr. Interest A/c...............Dr.
Instalment due To Hire Vendor’s A/c. To Interest Suspense A/c.
4. Payment of Instalment Hire Vendor’s A/c......Dr. Vendor A/c.................Dr.
To Bank A/c. To Bank A/c.
5. Annual depreciation Depreciation A/c.......Dr. Depreciation A/c...........Dr.
To Asset A/c. To Asset A/c.
6. Transfer of revenue Profit and Loss A/c....Dr. Profit and Loss A/c........Dr.
Accounts Balances To Depreciation A/c. To Depreciation A/c.
To Interest A/c. To Interest A/c.
_______________________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________________

_______________________________________________________________________________________________________________________________
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_______________________________________________________________________________________________________________________________

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Sr. BOOKS OF SELLER
Transaction
No. Cash Price Method Interest Suspense Method
1. Sale of an asset Buyer’s A/c............Dr. Buyer’s A/c................Dr.
To Sales A/c. (Instalment Price)
(Cash Price) To Sales A/c.
(Cash Price)
To Interest Suspense A/c
(Total Interest)
2. Cash Down Bank A/c...............Dr. Bank A/c...................Dr.
To Buyer’s A/c. To Buyer’s A/c.
3. Interest accrued upto Instalment Buyer’s A/c...........Dr. Interest Suspense A/c......Dr.
due To Interest A/c. To Interest A/c.
4. Receipt of Instalment Bank A/c...............Dr. Bank A/c...................Dr.
To Buyer’s A/c. To Buyer’s A/c.
5. Transfer of revenue Sales A/c..............Dr. Sales A/c..............Dr.
Account Balances Interest A/c...........Dr. Interest A/c...........Dr.
To Trading A/c. To Trading A/c.
To Profit and Loss To Profit and Loss A/c.
A/c.
Note: According to the other method of recording entries under the Hire Purchase System, entries are
made at the time of payment of each Instalments. The interest included in the Instalment is debited to
Interest account and the principal sum is debited to the Asset Account. However depreciation is provided
on full cash price. This method is not normally followed.

6. REPOSSESSION OF GOODS UNDER HIRE PURCHASE SYSTEM

Under the hire purchase system, the hire vendor has a right of repossession of goods, on failure to receive the
Instalment on due date. This may be dealt with the following four categories:
i. No clause for valuation of repossessed goods
a) Full repossession
b) Part repossession

ii. Clause/agreement for valuation of repossessed goods

a) Full repossession
b) Part repossession
If the hire purchase agreement does not contain any clause for valuation of repossessed goods, the Instalments
paid by the buyer to the hire vendor are treated as hire charges and on repossession neither the amount is
payable by the buyer to the hire vendor or vice versa. Thus the balance in hire vendor’s account is transferred to
an asset account and balance in asset account, representing loss is transferred to profit and loss account. In case
of part repossession, the entries are passed only with reference to repossessed goods leaving the proper balance
in the vendor’s as well as in the asset account.
If the hire purchase agreement contains a clause for valuation of repossessed goods, agreed value of repossessed
7. 8

goods is determined and the entry for repossession is made with that value. The balance in vendor’s A/c. after
adjustment of repossession value, represents amount receivable from or payable to vendor in settlement of

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account. The balance in the asset account represents Profit / Loss on repossession and transferred to profit and
loss account. In case of part repossession the entries are passed only with reference to repossessed goods leaving
the proper balance in the Asset A/c.

Accounting entries in the books of Purchaser:

1. Interest accrued upto Instalment due / Date of Repossession
Interest A/c. .....Dr.
To Hire Vendor’s A/c.
2. Depreciation upto date of repossession
Depreciation A/c. .....Dr.
To Asset A/c.
3. Repossession of an asset.
Hire Vendor’s A/c. .....Dr.
To Asset A/c.
(Transfer of balance in Hire Vendor’s A/c. – in case there is no clause for valuation)
(Pass entry with agreed value in case there is clause for valuation)
4. Balance in Asset A/c.
Loss on Repossession A/c. .....Dr.
To Asset A/c.
(If there is Loss)
5. Balance in Vendor A/c. (if any)
Vendor A/c. .....Dr.
To Bank
(If amount was payable)
Accounting entries in the books of Hire Vendor:
1. Interest accrued upto Instalment due / Date of Repossession
Buyer’s A/c. .....Dr.
To Interest A/c.
2. Repossession of goods
Repossessed Goods A/c. .....Dr.
To Buyer’s A/c.
(Balance in Buyer’s A/c / agreed repossessed value)
3. Repairs, reconditioning charges etc.
Repossessed Goods A/c. .....Dr.
To Cash/Bank A/c.
4. Sale of repossessed goods
Cash/Bank A/c. .....Dr.
To Repossessed Goods A/c.
5. Profit / Loss on repossessed goods
a) Profit on sale
Repossessed Goods A/c. .....Dr.
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To Profit and Loss A/c.

b) Loss on sale/valuation

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Profit and Loss A/c. .....Dr.
To Repossessed Goods A/c.
6. Balance in Buyer A/c (if any)
Bank A/c .....Dr.
To Buyer A/c.
(If amount was receivable)
Note: Unsold repossessed goods are valued at cost including reconditions expenses (value of repossessed goods)
or net realisable value, whichever is lower.

7. PRACTICAL PROBLEMS

IN-CLASSROOM PROBLEMS PRACTISE PROBLEMS SELF-ASSESSMENT PROBLEMS

Essentials Growth Maturity

Q1. Calculation of Cash Price and Hire Purchase Price REG. PAGE NO.
Asha purchased a truck on hire purchase system. As per terms she is required to pay Rs. 70,000 down, Rs.
53,000 at the end of first year, Rs. 49,000 at the end of second year and Rs. 55,000 at the end of third year.
Interest is charged @ 10% p.a. You are required to calculate the total cash price of the truck and the interest
paid with each instalment.

Q2. Calculation of Cash Price and Hire Purchase Price REG. PAGE NO.
A acquired on 1st January, 2020 a machine under a Hire-Purchase agreement which provides for 5 half-
yearly instalments of Rs. 6,000 each, the first instalment being due on 1st July, 2020. Assuming that the
applicable rate of interest is 10 per cent per annum, calculate the cash value of the machine. All working
should form part of the answer.

Q3. Calculation of Cash Price and Hire Purchase Price REG. PAGE NO.
On 1st April, 2020 a manufacturing company buys on Hire-purchase system a machinery for Rs. 90,000,
payable by three equal annual instalments combining principal and interest, the rate of interest was 5%
per annum. Calculate the amount of cash price and interest. Assume that the present value of an annuity of
one rupee for three years at 5% interest is Rs. 2.723.

Q4. Calculation of Cash Price and Hire Purchase Price REG. PAGE NO.
Om Ltd. purchased a machine on hire purchase basis from Kumar Machinery Co. Ltd. on the following
terms:
(a) Cash price Rs. 80,000
(b) Down payment at the time of signing the agreement on 1.1.2020 Rs. 21,622.
(c) 5 annual instalments of Rs. 15,400, the first to commence at the end of twelve months from the date
of down payment.
(d) Rate of interest is 10% p.a.
You are required to calculate the total interest and interest included in cash instalment.

Q5. Calculation of Cash Price and Hire Purchase Price REG. PAGE NO.
On 1st April, 2019 Fastrack Motors Co. sells a truck on hire purchase basis to Teja Transport Co. for a total
7. 10

hire purchase price of Rs. 9,00,000 payable as to Rs. 2,40,000 as down payment and the balance in three
equal annual installments of Rs. 2,20,000 each payable on 31st March, 2020, 2021 and 2022. The hire
vendor charges interest @ 10% per annum.

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You are required to ascertain the cash price of the truck for Teja Transport Co. Calculations may be made
to the nearest rupee.

Q6. Calculation of Cash Price and Hire Purchase Price REG. PAGE NO.
Happy Valley Florists Ltd. acquired a delivery van on hire purchase on 01.04.2018 from Ganesh
Enterprises. The terms were as follows:
Particulars Amount (Rs.)
Hire Purchase Price 180,000
Down Payment 30,000
1st installment payable after 1 year 50,000
2nd installment after 2 years 50,000
3rd installment after 3 years 30,000
4th installment after 4 years 20,000
Cash price of van Rs.1,50,000. You are required to calculate Total Interest and Interest included in each
instalment.

Q7. Accounting for Hire Purchase Transactions: Cash Price Method REG. PAGE NO.
On January 1, 2018 HP M/s acquired a Pick-up Van on hire purchase from FM M/s. The terms of the contract
were as follows:
(a) The cash price of the van was Rs. 1,00,000.
(b) Rs. 40,000 were to be paid on signing of the contract.
(c) The balance was to be paid in annual instalments of Rs. 20,000 plus interest.
(d) Interest chargeable on the outstanding balance was 6% p.a.
(e) Depreciation at 10% p.a. is to be written-off using the straight-line method.
You are required to:
(a) Give Journal Entries and show the relevant accounts in the books of HP M/s from January 1, 2018 to
December 31, 2020; and
(b) Show the relevant items in the Balance Sheet of the purchaser as on December 31, 2018 to 2020.

Q8. Accounting for Hire Purchase Transactions: Interest Suspense Method REG. PAGE NO.
On January 1, 2018 HP M/s acquired a Pick-up Van on hire purchase from FM M/s. The terms of the contract
were as follows:
(a) The cash price of the van was Rs. 1,00,000.
(b) Rs. 40,000 were to be paid on signing of the contract.
(c) The balance was to be paid in annual instalments of Rs. 20,000 plus interest.
(d) Interest chargeable on the outstanding balance was 6% p.a.
(e) Depreciation at 10% p.a. is to be written-off using the straight-line method.
On this basis, prepare H.P. Interest Suspense Account, Interest Account and FM M/s Accounts and Balance
Sheets in the books of hire purchaser.

Q9. Accounting for Repossession of Goods REG. PAGE NO.

A machinery is sold on hire purchase. The terms of payment is four annual Instalments of Rs. 6,000 at the
end of each year. First installment is payable after 1 year from date of agreement. Interest is charged 20%
and is included in the annual payment of Rs. 6,000.
Show Machinery Account and Hire Vendor Account in the books of the purchaser who defaulted in the
payment of the third yearly payment where upon the vendor repossessed the Machinery. The purchaser
7.11

provides depreciation on the machinery @ 10% per annum on WDV Basis. All workings should from part
of your answer.

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Q10. Accounting for Repossession of Goods REG. PAGE NO.
X Ltd. purchased 3 milk vans from Super Motors costing Rs. 75,000 each on hire purchase system. payment
was to be made: Rs. 45,000 down and the remainder in 3 equal instalments together with interest @ 9%.
X Ltd. writes off depreciation @ 20% on the diminishing balance. It paid the instalment at the end of the
1st year but could not pay the next. Super Motor agreed to leave one milk van with the purchaser, adjusting
the value of the other two milk vans against the amount due. The milk vans were valued on the basis of
30% depreciation annually on written down value basis. X Ltd. settled the seller’s dues after three months.
You are required to give necessary journal entries and the relevant accounts in the books of X Ltd.

Q11. Accounting for Repossession of Goods REG. PAGE NO.

A firm acquired two tractors under hire purchase agreements, details of which are as follows:
Tractor-A (1st April 2019) Cash Price Rs. 14,000
Tractor-B (1 October 2019)
st Cash Price Rs. 19,000
Both agreements provided for payment to be made in twenty-four monthly instalments (of Rs. 600 each
for Tractor A and Rs. 800 each for Tractor B), commencing on the last day of the month following purchase,
all Installments being paid on due dates.
On 30th June, 2020, Tractor B was completely destroyed by fire. In full settlement, on 10th July, 2020 an
Insurance company paid Rs. 15,000 under a comprehensive policy. Any balance on the hire purchase
company’s account in respect of these transactions was to be written off.
The firm prepared accounts annually to 31st December and provided depreciation on tractors on a straight-
Line basis at a rate of 20 per cent per annum rounded off to nearest ten rupees, apportioned as from the
date of disposal.
You are required to record these transactions in the following accounts, carrying down the balances on 31st
December, 2019 and 31st December, 2020:
(a) Tractors on hire purchase.
(b) Provision for depreciation of tractors.
(c) Disposal of tractors

Q12. Accounting for Repossession of Goods REG. PAGE NO.

Lucky bought 2 tractors from Happy on 01.10.2015 on the following terms:
Particulars Amount (Rs.)
Down Payment 5,00,000
1st installment payable after 1 year 2,65,000
2nd installment after 2 years 2,45,000
3rd installment after 3 years 2,75,000
Interest is charged at 10% P.A. Lucky provides depreciation @ 20% on the diminishing balances. On 30-9-
2018 Lucky failed to pay the 3rd installment upon which Happy repossessed 1 tractor. Happy agreed
to leave one tractor with Lucky and adjusted the value of the tractor against the amount due. The tractor
taken over was valued on the basis of 30% depreciation annually on written down basis. The balance
amount remaining in the vendor's account after the above adjustment was paid by Lucky after 3 months
with interest @ 18% p.a.
You are required to:
(1) Calculate the cash price of the tractors and the interest paid with each installment.
(2) Prepare Tractor Account and Happy Account in the books of Lucky assuming that books are
closed on September 30 every year. Figures may be rounded off to the nearest rupee.

Q13. Accounting for Repossession of Goods REG. PAGE NO.

7. 12

The following particulars relate to hire purchase transactions:

(a) X purchased three cars from Y on hire purchase basis, the cash price of each car being Rs. 2,00,000.
(b) The hire purchaser charged depreciation @ 20% on diminishing balance method.

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(c) Two cars were seized by on hire vendor when second installment was not paid at the end of the second
year. The hire vendor valued the two cars at cash price less 30% depreciation charged under it
diminishing balance method.
(d) The hire vendor spent Rs. 10,000 on repairs of the cars and then sold them for a total amount of Rs.
1,70,000.
You are required to compute: (i) Agreed value of two cars taken back by the hire vendor.(ii)Book value of
car left with the hire purchaser.(iii)Profit or loss to hire purchaser on two cars taken back by their hire
vendor.(iv)Profit or loss of cars repossessed, when sold by the hire vendor.

IN-CLASSROOM PROBLEMS PRACTISE PROBLEMS SELF-ASSESSMENT PROBLEMS

Essentials Growth Maturity

Q1. Calculation of Cash Price and Hire Purchase Price (ICAI SM Q1/11.41) REG. PAGE NO.
‘A’ acquired on 1st January, 2020 a machine under a Hire-Purchase agreement which provides for 5 half-
yearly instalments of Rs. 6,000 each, the first instalment being due on 1st July, 2020. Assuming that the
applicable rate of interest is 10 per cent per annum, calculate the cash value of the machine. All working
should form part of the answer.
ANSWER: Cash Price = Rs. 25,977 and Total Interest Rs. 4,023.

Q2. Accounting for Hire Purchase Transactions as if it is normal sales REG. PAGE NO.
S.T. Collieries purchases wagon from K. Wagon Co. on the Instalment system on 1st April, 2009 payment
being made Rs. 6,000 down and Rs. 6,000 annually for 3 years. The cash price is Rs. 22,340. The rate of
interest is 5%. Depreciation is written off at the rate of 10% on the diminishing value. Give journal entries
in the books of both the parties. Also show the various items in the Balance Sheet of S.T. Collieries.

Q3. Accounting for Repossession of Goods REG. PAGE NO.

The following particulars relate to hire purchase transactions:
(a) X purchased three cars from Y on hire purchase basis, the cash price of each car being Rs. 2 ,00,000.
(b) The hire purchaser charged depreciation @ 20% on diminishing balance method.
(c) Two cars were seized by on hire vendor when second installment was not paid at the end of the second
year. The hire vendor valued the two cars at cash price less 30% depreciation charged under it diminishing
balance method.
(d) The hire vendor spent Rs. 1 0,000 on repairs of the cars and then sold them for a total amount of Rs.
1,70,000.
You are required to compute: (i) Agreed value of two cars taken back by the hire vendor. (ii) Book value of
car left with the hire purchaser. (iii) Profit or loss to hire purchaser on two cars taken back by their hire
vendor. (iv) Profit or loss of cars repossessed, when sold by the hire vendor.
ANSWER: (a) Rs. 1,96,000 (b) Rs. 1,28,000 (c) Rs. Loss Rs. 60,000 and (d) Loss Rs. 36,000
7.13

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IN-CLASSROOM PROBLEMS PRACTISE PROBLEMS SELF-ASSESSMENT PROBLEMS

Essentials Growth Maturity

Q1. REG. PAGE NO.

X Transport Ltd. purchased from Delhi Motors 3 Tempos costing Rs. 50,000 each on the hire purchase
system on 1-1-2019. Payment was to be made Rs. 30,000 down and the remainder in 3 equal annual
instalments payable on 31-12-2019, 31-12-2020 and 31-12-2021 together with interest @ 9%. X
Transport Ltd. write off depreciation at the rate of 20% on the diminishing balance. It paid the instalment
due at the of the first year i.e. 31-12-2019 but could not the next on 31-12-2020. Delhi Motors agreed to
leave one Tempo with the purchaser on 1-1-2021 adjusting the value of the other 2 Tempos against the
amount due on 31-12-2020. The Tempos were valued on the basis of 30% depreciation annually. Show the
necessary accounts in the books of X Transport Ltd. for the years 2019, 2020 and 2021.

Q2. REG. PAGE NO.

M/s Amar bought six Scooters from M/s Bhanu on 1st April, 2015 on the following terms:
Down payment Rs. 3,00,000
1st Instalment payable at the end of 1st year Rs. 1,59,000
2nd Instalment payable at the end of 2nd year Rs. 1,47,000
3rd Instalment payable at the end of 3rd year Rs. 1,65,000
Interest is charged at the rate of 10% per annum.
M/s Amar provides depreciation @ 20% per annum on the diminishing balance method. On 31st March,
2018 M/s Amar failed to pay the 3rdinstalment upon which M/s Bhanu repossessed two Scooters. M/s
Bhanu agreed to leave the other four Scooters with M/s Amar and adjusted the value of the repossessed
Scooters against the amount due. The Scooters taken over were valued on the basis of 30% depreciation
per annum on written down value. The balance amount remaining the vendor's account after the above
adjustment was paid by M/s Amar after 5 months with interest @ 15% per annum. M/s Bhanu incurred
repairing expenses of Rs. 15,000 on repossessed scooters and sold scooters for Rs. 1,05,000 on 25th April,
2018.
You are required to: (1) Calculate the cash price of the Scooters and the interest paid with each instalment.
(2) Prepare Scooters Account and M/s Bhanu Account in the books of M/s Amar. (3) Prepare Goods
Repossessed Account in the books of M/s Bhanu.

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