FINANCIAL

ACCOUNTING-II
Hemavathi R
Bcom (CA)
2213141040020
VARIOUS CIRCUMSTANCES OF
CALCULATING INTEREST
(1) When the rate of interest, the cash price and the instalments are given:
Under this method, the interest is to be calculated on the outstanding balance of the
cash price at the stipulated rate. When interest component is deducte from
instalment, the balance represents the amount paid in reduction of cak price. This
amount is deducted from the cash price to facilitate the calculation of interest for the
next period. Since the instalments are in round sums of money, the interest for the
final year should be taken as the difference between the cal price outstanding at the
end of that period and the amount of instalments.
(ii) When total cash price and instalments are given but rate of interest is not
given:
When the rate of interest is not given, the interest included in each instalmentwill be
calculated on the basis of the hire purchase price outstanding in the beginning of
each year.
(iii)When rate of interest and instalments are given but total cash price is not
given.
When the amount of each instalment which includes interest is given and rate of
interest is also given, cash price is found out in the following manner: (a) First of
all find out cash price of the last instalment.
Amount of last instalment x Rate of interest
100 + Rate of interest
=Interest included in the last instalment.
This interest is deducted from last instalment and cash price of the la instalment is
found out.
(b) (Cash price of the last x Rate of interest
instalment + amount of prior instalment) 100 + Rate of interest
When the interest is deducted from prior instalment, cash price of the prior
instalment is found out.
(c) The same process may be repeated for earlier instalments
(iv) When rate of interest and total cash price are given but the instalment price
is not given.
In this method is also, the interest is to be calculated on the outstanding balance of
the cash price at the stipulated rate. Then cash price paid is deducted from the total
cash price and interest is calculated for the next period falling between the dates of
payment of first instalment and second instalment. This process is repeated till the
payment of last instalment. The instalment price is calculated by adding interest with
cash price of each instalment.
(v) Calculation of cash price by Annuity method:
When in place of cash price, hire purchase price and annuity rate are given, the cash
price is calculated by multiplying the amount of instalment with the annuity factor
given and adding down payment to the product., Then interest is calculated.
PROBLEM:
When rate of interest, total cash price and instalments are given:
Mohan purchases a car on hire purchase system. The total cash price of the car Rs. 15,980, payable
Rs.4,000 down and in three instalments of Rs.6,000, Rs.5,000 and Rs. 2,000 at the end of first, second and
third years respectively. Interest is charged at 5% per annum. You are required to calculate interest paid
by hirer, each year.
Solution : Table showing calculation of Interest
Particulars(1) Total cash price Instalment paid Interest paid (4) Cash price
(2) (3) (3-4=5)
Cash price 15980
(-)Down payment 4000 4000 - 4000

11980
1st instalment 5401 6000 599 5401
(11980×5÷100)
6579
2nd instalment 4671 5000 329 4671
(6579×5÷100)
3rd instalment 1908 2000 92 1908
Nil 17000 1020 15980