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Accounting for Hire Purchase
☞ Procedures and rules under Hire Purchase Act 1967. Definition hire purchase rights seller’s right ☞ Accounting by purchaser/hirer: recognition of interest expense repossession ☞ Accounting by seller/owner: recognition of interest revenue and gross profit repossession . ☞ Disclosure requirement
By the end of this chapter, students should be able to: Explain the nature of hire purchase Journalize the entry using gross method Explain the treatment for hire purchase in different situations Explain the disclosure requirements
BKAF3063 A122 3
Hire Purchase Act 1967: “Hire purchase agreement” includes a letting of goods with an option to purchase and an agreement for the purchase of goods by installments. Legal view: Hire Purchase is a system of acquiring goods on credit whereby The seller of the goods is regarded as the dealer, the purchaser is regarded as the hirer and the finance company as the owner. www.lawyerment.com.my
BKAF3063 A122 4
Hire-Purchase Act 1967
☺ Hire purchase price: - the total sum payable by the hirer under a hire-purchase agreement in order to complete the purchase of goods. ☺ Hirer: - The person who takes goods from the owner under a hire-purchase agreement. ☺ Owner: - a person who lets a goods to a hirer under a hire-purchase agreement. ☺ Minimum deposit: - no minimum deposit prescribed, it should not less than one-tenth (10%) of the cash price of the goods.
Hire-Purchase Act 1967 ☺ Details must be stated in agreement: 1) specify a date on which the hiring shall be deemed to have commenced. 5) contain a description of the goods sufficient to identity them. 6) specify the address where the goods under the hire purchase agreement are. BKAF3063 A122 6 . 3) specify the amount of each of installments and the person whom and the place at which the payments of these installments are to be made. 4) specify the time for the payment of each of those installments. 2) specify the number of installments to be paid under the agreement by the hirer.
BKAF3063 A122 7 .Hire-Purchase Act 1967 ☺ Among others. it must also set out in tabular form: 1) cash price 2) freight or delivery charges if any 3) vehicle registration fees 4) insurance 5) terms charges or interests 6) the annual percentage rate for terms charges 7) the balance originally payable under the agreement 8) the total amount payable.
including stage buses BKAF3063 A122 8 .Hire-Purchase Act 1967 Only the following goods can be bought on hire purchase in Malaysia : 1) all consumer goods 2) motor vehicles namely 3) invalid carriages 4) motor cycles 5) motor cars including taxi cabs and hire cars 6) goods vehicles where the maximum permissible laden weight does not exceed 2.540 kilograms 7) buses.
Hire-Purchase Vs Credit Sales Hire-purchases Ownership of the asset Return of goods Credit sales Not transferred Returnable Yes BKAF3063 A122 Transferred Not returnable No 9 Repossession of goods .
Accounting for Hire-Purchase in the book of Hirer BKAF3063 A122 10 .
Method of recording: 1.HP in the Book of Hirer Substance over form. Gross Method BKAF3063 A122 11 . Net Method 2. Cost of asset = cash price Hire-purchase price = Cash price + interest or = Deposit + installments amount Depreciation: cost over useful life of the asset.
Method of amortization: 1) 2) 3) Actuarial / effective interest / residual balance Sum-of-the-years digit Straight line BKAF3063 A122 12 .cash price Matching principle applied: interest need to be amortized.Hirer : Interest Interest rate: should not be more than 10% per annum. Total interest = hire-purchase price .
The company paid deposit of RM1.Hirer : Interest Illustration 1: On 1 July 2012. ABC Bhd purchased a machine under hirepurchase agreement with Banker Berhad.000 and further installments of RM902 per month for 5 month starting from 31 July 2012. The current effective interest rate is 0.83% per month. The cash price of the machine is RM5.400. Interest rate charged is 6% per year. BKAF3063 A122 13 .
000 + (902 x 5) = RM5.510 Interest = HP price – Cash price = 5.400 = RM110 Interest amortization? BKAF3063 A122 14 .Hirer : Interest Solution to Illustration 1: HP price = cash deposit + installments = 1.510 – 5.
52 29.79 7. Effective interest method: Installment 1.781.74 894.26 887.21 894.74 0 BKAF3063 A122 15 .09 865.661.534.52 2.95 4 5 902 902 14.91 Interest (0.48 872.400 3.83%) Principle Balance 4.000 1 2 3 902 902 902 36.34 22.66 897.86 1.Hirer : Interest 1.
Senja Trading Co.200 per month for 6 month starting from 31 July 2012.Hirer : Interest Illustration 2: On 1 July 2012. The cash price of the delivery van is RM50.000.000 and further installments of RM5. BKAF3063 A122 16 . Interest rate charged is 8% per year. The company paid deposit of RM20. purchased a delivery van under hire-purchase agreement with Banker Berhad.
000 = RM1.000 + (5.200 Interest amortization? BKAF3063 A122 17 .200 – 50.Hirer : Interest Solution to Illustration 2: HP price = cash deposit + installments = 20.200 Interest = HP price – Cash price = 51.200 x 6) = RM51.
200 (2/21) x 1.200 (5/21) x 1.200 (4/21) x 1. Sum-of-the-years digit: Number for specific installments x total interest Total number of installments Amortization of interest: Inst. 1 2 3 Calculation (6/21) x 1.200 (1/21) x 1.200 BKAF3063 A122 171 114 57 18 .Hirer : Interest 2.200 n(n+1) = 6(6+1) = 21 2 2 Interest (RM) 343 286 229 4 5 6 (3/21) x 1.
Hirer : Interest 2. Straight-line: Total interest .200 / 6 = RM200 per month BKAF3063 A122 19 . Total number of installments Amortization of interest = 1.
200 5. Account payable BKAF3063 A122 (To record interest expense) 20.000 (To record amount payable to seller – cash price) Dr. Interest expense Cr. Account payable 50.Hirer : Net Method Refer to Illustration 2: using sum-of-the-year method 1 July 2012 Dr. Asset (cash price) 50. Account payable Cr. Cash (To record payment of deposit) 31 July 2012 Dr.000 20. Cash (To record payment of instalment) Dr.000 5.200 343 343 20 . Account payable Cr.000 Cr.
Account payable 5.200 (To record amount payable to seller – hp price) Dr. Cash 20. Account payable 51. Cash 5. Interest expense 343 Cr. Asset (cash price) 50. Deferred interest 343 BKAF3063 A122 (To record interest expense) 31 July 2012 21 .200 (To record payment of instalment) Dr.000 Deferred interest 1.000 Cr.Hirer : Gross Method Refer to Illustration 2: using sum-of-the-year method 1 July 2012 Dr.000 (To record payment of deposit) Dr. Account payable 20.200 Cr.200 Cr.
HP in the Book of Hirer Situations: 1. Hirer fail to pay installment defaults & repossession BKAF3063 A122 22 . HP complete as per contract. 2.
S16(2): owner feel suspicious that asset will be transferred to another place other than place which stated in contract . Notice should be given to hirer to notify about the repossession (Schedule 4). Owner has the right to repossess asset after 21 days of notification.Owner has a right to repossess asset if: S16(1): hirer fails to pay 2 installments consecutively or fail to pay last installment.Hirer:Default and Repossession S16 . BKAF3063 A122 23 .
Hirer:Default and Repossession S16A. or b) settle contract before maturity date. the hirer would not bear any cost related to the repossession. storage and other cost. BKAF3063 A122 24 . S16(3): Alternatives given to hirer: a) renew the contract.If asset is returned within 21 days of notification. or c) let owner to repossess goods.
Hirer:Default and Repossession a) renew the contract: Payment to be made: (+) (+) (+) (+) Installment in arrears interest in arrears storage/custody/repair cost repossession cost redelivery cost BKAF3063 A122 25 .
Hirer:Default and Repossession b) settle contract before maturity date: Payment to be made: Hire-purchase price (-) (deposit + installment paid) (-) statutory rebate (+) storage/custody/repair cost (+) repossession cost xx xx xx xx xx BKAF3063 A122 26 .
Sipadan Co.000 and further installments of RM4. BKAF3063 A122 27 .375 per month for 12 months starting from 31 January 2004. Sipadan Co. due to its failure to pay the last two installments (July & August). 21 days later. purchased a drilling machinery under a hirepurchase agreement with Siberi Berhad. On 15 September 2012.Hirer:Default and Repossession ☞ Illustration 3: On 1 January 2012. Interest rate charged is 5% per year.000 with estimated useful life of 10 years. The cash price of the machinery is RM70. The storage and repossession costs to be borne were RM200 and RM350 respectively. the company decided to make a payment to settle the contract. The company paid deposit of RM20. received a notice to repossess by the Siberi Co.
Hirer:Default and Repossession Solution to Illustration 3: Payment to be made: Hire-purchase price (-) deposit + installment paid (-) statutory rebate (+) storage/custody/repair cost (+) repossession cost 72.000 + (4.375 x6) 3(3+1) / 2 x 2.500 12(12+1) / 2 BKAF3063 A122 28 .608 20.250 192 200 350 26.500 46.
Account payable 26.608 Deferred interest expense 673 (6+5+4)/78 x 2. Cash 26.250 Interest expense 481 Loss on hp settlement 550 Cr.500 (6+5+4+3+2+1)/78 x 2.500 BKAF3063 A122 29 .Hirer:Default and Repossession ☞ Solution to Illustration 3: Journal entries: Dr.
price to pay by a new hirer by cash minus: .repossession cost . reasonable best price.storage cost -A122 sales cost/written-off goods BKAF3063 30 . vice versa. hirer must pay original unpaid balance (hp price) () statutory rebate 1.Hirer:Default and Repossession c) let owner to repossess goods: if: Repossess good’s value + total paid > Total net payable hirer can claim the excess. or 2.
Sipadan Co. The machinery was then taken back by the owner on 1 October 2012 and incurred the following cost: Storage RM200. due to its failure to pay the last two installments (July & August).Hirer:Default and Repossession Illustration 4: Using the same information in Illustration 3: On 10 September 2012. BKAF3063 A122 31 . The price of the machinery at the repossession date was RM30. and repossession cost of RM350. received a notice to repossess by the Siberi Co. reselling RM500.000.
200 – 52.375 x 12) .200 Total net payable = (4.000 – (200 + 500 + 350)] + (4.192 = 52.308 Total claimable = 55.892 Journal entries? Amount receivable from owner BKAF3063 A122 32 3(3+1) / 2 x 2.375 x 6) = RM55.308 = 2.Hirer:Default and Repossession ☞ Solution to Illustration 4: Repossess good’s value + total paid = [30.500 12(12+1) / 2 .
250 Cr.892 Account payable 26. Depreciation expense 5. Accumulated depreciation 5.250 Loss on repossession 35. Deferred interest 481 [(6+5+4)/78 x 2. Deferred interest expense 192 Machinery 70.800 Cr.000 BKAF3063 A122 33 .Hirer: Default and Repossession Journal entries on the date of repossession: 1 Oct 2012 Dr.000 x 10% x 9/12) Dr. Interest expense 481 Cr.250 (70.250 Accumulated depreciation 5.500] Dr. Cash 2.
Accounting for Hire-Purchase in the book of Owner BKAF3063 A122 34 .
HP in the Book of Owner Use sales method: Account receivables Revenue: .Interest revenue (Hp price – Cash price) Inventory method: No receivables to be recorded – only when no payment received for expired installment. BKAF3063 A122 35 .Gross profit (Cash price – COGS) .
Gross profit: Immediate recognition based on collection HP price Journal entries on the agreement date: Dr.HP in the Book of Owner Interest revenue: to defer and contra with AR. Accounts receivable Cr. Sales revenue Deferred interest revenue A122 HP price –BKAF3063 Cash price xxx xxx xxx Cash price 36 .
Owner:Recognition of Gross Profit Recognition based on collection: Gross Profit Realized = Gross profit x (collection – interest recognized) Cash price BKAF3063 A122 37 .
Owner:Recognition of Gross Profit ☞ Illustration 5: On 1 May 2011. Hijau Co. The cost and cash price of the machine is RM7.000 and RM9. The agreement requires a cash deposit of RM1. closes its account on 31 December each year.000 and 11 monthly installment of RM780 starting from 31 May 2011 and final installment of RM770. sold a risographic machine to Merah Co. on hire purchase. The interest rate used is 10% per year. BKAF3063 A122 38 . Hijau Co.500 respectively.
000 = RM2.500 = RM850 GP = 9.350 Total interest = 10.500 – 7.000 = RM10.Owner:Recognition of Gross Profit ☞ Solution to Illustration 5: HP price = (780 x 11) + 770 + 1.500 Journal entries? BKAF3063 A122 39 .350 – 9.
Accounts receivable 10.000 1.000 31 May – 30 Nov 2011 Dr. Accounts receivable Cr. Cash Cr. Cash Cr. Sales revenue Deferred interest revenue Dr. Accounts receivable BKAF3063 A122 780 780 40 .350 9.Owner:Recognition of Gross Profit Journal entries: 1 May 2011 Immediate recognition Dr.000 7. COGS Cr.500 850 7.000 1. Inventory Dr.
500 7. Income summary Dr. Deferred interest revenue Cr. Income summary BKAF3063 A122 . Accounts receivable Dr. Interest revenue (12+11+10+9+8+7+6+5)/78 x 850 780 780 741 741 9.Owner:Recognition of Gross Profit Journal entries: 31 Dec 2011 Dr.Dec Dr.000 741 741 41 May . Interest revenue Cr. COGS Dr. Income summary Cr.000 7.500 9. Cash Cr. Sales revenue Cr.
741 42 .(780x8) Current Assets: Account receivable Less: Deferred interest revenue BKAF3063 A122 3.001 850 .000 2.1.350 .500 7.Owner:Recognition of Gross Profit Hijau Company Income Statement For the year ended 31 Dec 2011 (partial) Sales revenue Less: COGS Gross profit Other income: Interest revenue 9.110 109 3.000 .500 741 Hijau Company Balance Sheet 31 December 2011 (partial) 10.
Owner:Recognition of Gross Profit Journal entries: Recognition 1 May 2011 based on collection 10.000 1.000 7. Inventory Dr. Accounts receivable 31 May – 30 Nov 2011 Dr. Cash Cr. COGS Cr.000 1.350 9. Sales revenue Deferred interest revenue Dr. Accounts receivable Cr. Accounts receivable BKAF3063 A122 780 780 43 .500 850 7. Cash Cr.000 Dr.
Deferred Gross Profit Dr. Deferred interest revenue Cr. Cash Cr. Interest revenue Dr. Interest revenue Cr.500 7.500 9. Income summary BKAF3063 A122 780 780 741 741 9.000 741 741 44 . Deferred Gross Profit Cr.000 7. COGS Dr. Sales revenue Cr.Owner:Recognition of Gross Profit 31 Dec 2011 Dr. Accounts receivable Dr.
741 BKAF3063 A122 45 . 710 1. Deferred Gross Profit Cr.499 9.500 Dr.710 [1. Income summary 1.710 1. Gross Profit realized Cr.000 + (780 x 8)] .Owner:Recognition of Gross Profit 31 Dec 2011 Dr. Gross Profit realized 1.500 x 6.710 2.
500 – 1.710 3.110 109 790 2.211 46 .Owner:Recognition of Gross Profit Hijau Company Income Statement For the year ended 31 Dec 2011 (partial) Gross profit realized Other income: Interest revenue Hijau Company Balance Sheet 31 December 2011 (partial) 1.710 741 Current Assets: Account receivable Less: Deferred interest revenue Deferred GP BKAF3063 A122 2.
Recognize gain or loss from repossession. BKAF3063 A122 47 .Owner:Repossession Journalize the closing entries for: Accounts Receivable Deferred interest Deferred GP Transfer to Repossession account.
. charged Merah Co. to settle the arrears since January 2012. The best value of the asset at the date of the repossession is RM7. The selling cost of the machine is 48 BKAF3063 A122 expected to be RM600.800.Owner:Repossession ☞ Illustration 6: Refer to Illustration 5. Hijau Co. storage RM150 and repair of RM230. also failed to return the assets after 21 days receiving notice of repossession. Merah Co. for repossession charge of RM360. Assume Hijau Co. has repossessed the asset on 1 April 2012 due to failure of Merah Co.
339 Total claimable (hirer) = (7.Owner:Repossession ☞ Solution to Illustration 6: Repossess good’s value = 7.961 Journal entries? Amount to be paid to hirer BKAF3063 A122 49 1(1+1) / 2 x 850 12(12+1) / 2 .800 – (360 + 150 + 230) = RM7.240) – 10.11 = RM10.000 + (780 x 8) = RM7.350 .060 + 7.240 Total net receivable = 10.060 Total payment = 1.339 = RM3.
200 (Record the repossess asset) BKAF3063 A122 50 7. Accounts receivable 3. for Jan. Repossession account 3. Inventory 7. Repossession account 7.600 . Deferred interest revenue 98 Cr. Deferred interest revenue 11 Cr.800 . Interest revenue 98 (Recognize interest rev.200 Cr.Owner:Repossession Journal entries: 1 April 2012 Immediate recognition (4+3+2) / 78 x 850 Dr.099 (Close accounts receivable) Dr. Feb & March 2005) Dr.099 Cr. Accounts receivable 11 (Record statutory rebate April 2005) Dr.
Repossession account 740 Cr.961 (Record payment claimable by hirer) Dr. Repossession account 600 (Record loss on repossession) BKAF3063 A122 51 . Repossession account 3. Income summary 600 Cr. Cash 3.Owner: Repossession Journal entries: 1 April 2012 Immediate recognition Dr.961 Cr. Cash 740 (Record the repossession. storage & repair expenses) Dr.
099 Cr. Inventory 7. for Jan. Repossession account 7.Owner: Repossession Journal entries: 1 April 2012 Based on collection Dr.099 (Close accounts receivable) Dr. Repossession account 3. Accounts receivable 11 (Record statutory rebate April 2005) Dr. Deferred interest revenue 98 Cr. Interest revenue 98 (Recognize interest rev. Feb & March 2005) Dr.600 .800 .200 (Record the repossess asset) BKAF3063 A122 52 7. Deferred interest revenue 11 Cr. Accounts receivable 3.200 Cr.
Repossession account 740 Cr.961 (Record payment claimable by hirer) Dr. Cash 740 (Record the repossession.961 Cr. Repossession account 790 (Close Deferred GP account) BKAF3063 A122 53 . Cash 3. storage & repair expenses) Dr. Deferred GP 790 Cr. Repossession account 3.Owner: Repossession Journal entries: 1 April 2012 Based on collection Dr.
Income summary (Record gain on repossession) 190 190 BKAF3063 A122 54 . Repossession account Cr.Owner: Repossession Journal entries: 1 April 2012 Based on collection Dr.
End of Chapter 2 Reference: Hire Purchase Act 1967 BKAF3063 A122 55 .