HIRE PURCHASE ACCOUNTS

DR. WEKESA
Hire Purchase
Definition

 Section 2© of the Hire Purchase Act, 1972

 Characteristics of Hire Purchase

 Rights of Hirer
Accounting Records in the books of the
purchaser
Ratio of interest and amount due.
1. Ratio of interest and amount due = Rate of
interest/ 100 + Rate of interest =
10/110=1/11
Illustration

 Acquired on 1st January, 20X1 a machine under a Hire-

Purchase agreement which provides for 5 half-yearly
installments of Shs. 6,000 each, the first installment
being due on 1st July, 20X1. Assuming that the
applicable rate of interest is 10% p.a, calculate the cash
value of the machine.
Solution: Statements showing the cash value of the machine acquired on a hire-purchase basis

Installment Amount Interest @5% half- Principal Amount (in each

yearly(10% installment)
p.a)=5/105=1/21 ( in
each installment)

Shs. Shs. Shs.

5th Installment 6,000 286 5,714
Less: Interest (286)
5,714
Add: 4th Installment 6,000
11,714 558 5,442
Less: Interest (558) (6,000-558)
11,156
Add: 3rd Installment 6,000
17,156 817 5,183
Less: Interest (817) (6,000- 817)
16,339
Add: 2nd Installment 6,000
22,339 1,063 4,937
Less: Interest (1,063) (6,000-4,937)
21,276
Add: 1st Installment 6,000
27,276 1,299 4,702
Less: Interest (1,299) (6,000-1,299)
25,977 4,023 25,977
Illustration

 On January 1, 1987, IFB Ltd. Acquired machinery from JK Ltd. for Sh. 1886
(cash price) under a hire purchase agreement where Sh. 400 was the initial
payment, and two installments of Sh. 800 would be paid. Interest @ 6% p.a
would be charged.
 Prepare the ledger accounts in the books of IFB Ltd. assuming the rate of
depreciation @ 10% (straight line)
Solution

 In the books of JK Ltd.

 IFB Ltd

1987 Sh. 1987 Sh.

Jan 1 To sales A/c 1886 Jan 1 By Bank A/c 400
Dec 31 To Interest A/c 89 Dec 31 By Bank A/c (1stinstallment) 800
Dec 31 By Balance c/d 775
1975 1975
1988 1988
Jan 1 To Balance b/d 775 Dec 31 By Bank A/c (2ndinstallment) 800
Dec 31 To Interest A/c 25
800 800
  Interest Account

1987 Sh. 1987 By IFB Ltd Sh.

Dec 1 To Profit &Loss 89 Dec 31 89
A/C 89 89
1988 1988
Dec 31 25 Dec 31 By IFB Ltd 25
To Profit &Loss 25 25
A/C
Journal entries

1. When the asset is purchased

 No entry
1. When the down payment is made
 Asset A/c Dr
 Bank A/c Cr
1. When the installments become due
 Asset A/c Dr (Cash price part of installment)
 Interest A/c Dr (interest on installment)
 Hire Vendor Cr
1. When installment is paid
 Hire Vendor Dr
 Bank A/c Cr
1. When depreciation is charged
 Depreciation Dr
 Asset A/c Cr
1. When interest and depreciation accounts are closed by transfer to Profit & Loss A/c
 Profit & Loss A/c Dr
 Interest A/c Cr
 Depreciation A/c Cr

Disclosure in the balance sheet

 Assets
 Fixed Assets:
 Assets (t cash price) xxxxxx.xx
 Less: Depreciation xxxx.xx


 Liabilities
 Hire Purchase Creditors:
 Balance in hire vendors A/c xxxxx.xx
 Interest accrued not yet due xxxxx.xx
Illustration

On January 1, 20X1 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 shs. 1,000,000.

b) Shs. 40,000 were to be paid on signing of the contract.
c) The balance was to be paid in annual installments of shs. 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 annual Journal Entries and show relevant accounts in the books of HP M/s from January
1, 20X1 to December 31, 20X3; and
b) Show the relevant items in the balance sheet of the purchaser as on December 31, 20X1 to
20X3.
