Default and Repossession

Learning Outcome
• Cognize the importance of various methods for
accounting treatment of hire purchase
Various accounting method under Hire
Purchase
• Hire Purchase Trading Account (Debtors) method and
Stock and Debtors method of ascertaining profit or loss
on sale of goods of small value under hire purchase
system are not fully compliant with AS 19 “Leases”
• Asset Full Value method is commonly used for which the
accounting treatment has already been discussed
 DEFAULT
• 'Default' is the failure ko act, appear or pay i.e., failure to meet
obligation.
• Under a hire purchase agreement the hirer has an, obligation to
pay up to the last instalment so that the ownership of goods
smoothly passes to him. If he fails to meet this obligation, it will be
treated as default on his part
 REPOSSESSION
• Possession of goods means physical holding of goods.
• Under hire purchase agreement the vendor transfers the possession of
goods.
• He does not transfer the ownership, and if the hirer fails to pay even the last
instalment he has 'the legal right to recover the possession of the goods.
• This act of recovery of possession is termed as 'repossession'.
• There are two possibilities in repossession of goods as
Follows :-
• When the vendor takes back the complete repossession of asset
i.e., Complete Repossession.
• When the vendor takes repossession of only a part of the total
asset sold to the hire purchaser i.e., Partial Repossession
 Rights of the Hire Vendor
• Rights of hire vendor to terminate hire purchase
agreement:
Where the hirer makes more than one default in payment
of instalment as provided in the agreement, the hire vendor
(the owner) shall be entitled to terminate the agreement by
giving the notice of termination in writing
 Rights of the Hire Vendor
Rights of the hire vendor on termination:
Where a hire purchase agreement is terminated, the hire
vendor (the owner) shall-be entitled
(i) to enter the premises of the hirer and seize the goods,
(ii) to retain the hire charges already paid and to recover the
arrears of hire charges due, and
(iii) to claim damages for yon-delivery of the goods.
• Under the Hire Purchase System, goods are sold on instalment
basis.
• Ownership of goods is transferred when the last instalment is
paid.
• If the Hire Purchaser becomes a defaulter, the Hire Vendor has
the right to take away the goods and forfeit the instalments
received as hire charges for the use of goods.
• When the hire purchase customer makes default in the payment of installment,
the hire vendor has a right to repossess the goods sold under hire purchase
system. The essence of a hire purchase trans­action is to transfer the ownership
of goods (purchased by the hire purchaser) to hire purchaser only on his paying
the last installment.

• On committing default in the payment of any installment, the hire vendor

reserves the right to repossess the goods and hire purchaser has to forfeit the
installment already paid. The hire vendor repossesses either all the goods hired
out or only a few of them. Repos­session of all the goods is known as “Complete
Repossession” and repossession of a few of the goods is known as “Partial
Repossession”.
 Let’s solve it
• On January 1, 2017, IFB Ltd. acquired machinery from JK
Ltd. for Rs. 10,00,000(cash price) under a hire purchase
agreement where Rs. 400,000 was the initial payment
and two instalments of Rs. 300,000 each would be paid.
Interest @ 6% p.a. would be charged.
• Prepare the ledger accounts in the books of J.K. Ltd.,
assuming rate of depreciation @ 10% (straight line)