Hire Purchase Accounts

Hire PurchaseHire Purchase (HP) is one of the payment methods of which the buyer use the goods without immediate full settlement of the price of the goods

With Hire Purchase AgreementThe HP selling price includes normal Cash Price PLUS HP InterestThe seller agreed that the buyer could hire the goods by payments of deposit and instalments

Hire Purchase Price=Cash Price+Total Hire Purchase InterestOR=Deposit(Down payment)+Outstanding Balance(including HP interestpaid by instalments

Calculation of Hire Purchase InterestStraight line methodActuarial MethodSum-of-digits Method

Straight Line Method(Equal apportionment)Interest is apportioned evenly over the number of installments agreed upon.

HP Interest per instalment = Total HP Interest Number of total instalments

Example 1An asset is acquired on the following terms:Cash price$9000Down payment$1000HP Price$12200Nominal rate of interest10%Four annual instalments$2800

Total HP interest = $12000-$9000 =$3200HP interest payable per annum = $3200/4 = $800

OR

An alternative way to calculate hire purchase interest($9000-$1000)*10% = $800YearHP interestCapitalInstalments $ $ $ 1 2 3 480080080080028002800280028002000200020002000+ =Answer:

B. Actuarial MethodInterest is charged on the outstanding balance of the cash price after the down payment is made.

Equal instalmentsUnequal instalment

1 Equal instalmentExample 2An asset is acquired on the following terms:Cash price$9000Down payment$1000HP price$11096Interest10% on outstanding balanceFour annual instalment$2524

Equal instament = HP price Down payment No. of instalment (11096-1000)/4

YearHP interest CapitalInstalments $ $ $ 1 2 3 4(9000-1000)*10% =80025242524252425241724(8000+800-2524)*10%=6281896(6276+628-2524)*10%=4382086(4380+438-2524)*10%=2302294627643802096800010096

Unequal instalmentExample 3An asset is acquired on the following terms:Cash price$9000Down payment$1000HP price$11000Interest10% on outstanding balanceFour annual instament$2000+interest

Unequal instalment=Cash price-Down payment+Interest accrued No. of instalment (i.e.unpaid interest)

YearHP interest CapitalInstalments $ $ $ 1 2 3 4(9000-1000)*10% =8002800(8000+800-2800)*10%=600(6000+600-2600)*10%=400(4000+400-2400)*10%=2006000400020008000100002000200020002000260024002200

C. Sum of Digits MethodThe HP interest is apportioned according to the digit assigned (descending order) Using this method, more interest is charged in the earlier periods, less interest is charged in the later periods.

HP interest per instalment = Total HP interest* Digit assigned in the instalment Sum-of-digits of total instalmentWhen n = number of instalmentsSum of digits = n(n+1) 2

Example 4A motor vehicle was purchased under a hire purchase agreementCash price$10000Hire Purchase$13600Instalments4 monthsDate of sale1 October 1996Calculate the interest under each of the three cases:(a) First instalment due at the end of month from the date of sale(b) First instalment due at the beginning of month following the date of sale(c) First instalment due at the date of sale.

Case (a) and (b) Interest paid 1st instalment $3600*4/10=$14402nd instalment $3600*3/10=$10803rd instalment $3600*2/10=$7204th instalment $3600*1/10=$360Total HP interest =$13600-$10000=$3600Sum of digit= 4*(4+1)/2=10

Case ( C ) Interest paid 1st instalment $3600*3/6=$18002nd instalment $3600*2/6=$12003rd instalment $3600*1/6=$6004th instalment -Total HP interest =$13600-$10000=$3600Sum of digit= 3*(3+1)/2=6

Concept Chart

Purchasers Books

Acquisition of Assets on Hire PurchaseWhen an asset is acquired on hire purchase, there are 2 ways to account for this in the purchasers books. Progress interest charge systemInterest Suspense MethodThey differ mainly in the way they record hire purchase interest.

2 Method of HP Interest Treatment

Progress interest charge systemInterest suspense method

*3 method of HP InterestApportionment

Straight-line methodActuarial methodSum-of-digit method

= 6 Version

Progress interest charge systemInterest is charged upon each instalment.

Progress interest charge system:

Dr Fixed assetsCr HP CreditorWith cash price of assets (at the date of purchase)Dr HP CreditorCr BankWith deposit and instalment paidDr HP InterestCr HP CreditorWith hire purchase interest accrued for the current year (at the year end)Dr Profit and Loss (expense)Cr HP InterestWith the amount of hire purchase interest transferred to current years profit and loss accountDr Profit and LossCr Provision for depreciationAnnual depreciation charged on full cash price of the asset

Notes :Cut off of the financial period should be aware in order to

calculate the total hire purchase interest of the financial period to be reflected in the P/L account as an expense itemEach financial year may include up to 12 monthly instalment,

4 quarterly instalment or 2 half-yearly instalment

Balance Sheet PresentationFor instance: after 1st instalment PaidProgress interest charge system:

Balance Sheet ( Instalment for 1st year)Current LiabilitiesHP Creditor (Instalment for 2nd year)$XLong term LiabilitiesHP Creditor (Instalment for 3rd year and so on)XInstalment for 2nd year Interest payable for 2nd yearOutstanding HP creditor HP creditor on current liabilities

For instance: after 1st instalment PaidInterest Suspense Method:

Balance Sheet ( Instalment for 1st year)Current LiabilitiesHP Creditor (Instalment for 2nd year)$XLong term LiabilitiesHP Creditor (Instalment for 3rd year and so on)XLess HP interest suspense (X)Less HP interest suspense (X)XXOutstanding HP creditor Instalment for next yearOutstanding interest suspense interestPayable for 2nd yearInterest payable for 2nd year

Example Refer to textbook P.24

Example 6ABC Ltd. purchased a vehicle from Grace Ltd. on 1 Jan 1996 on HP agreement. The details were as followsCash price$9000Down payment$1000HP Price$11096Nominal rate of interest10% on outstanding balanceFour equal annual instalmentsFirst due31 Dec 1996Depreciation10% on costUsing (a) the progress interest charge system and (b) interest suspense method, show transactions in books of ABC Ltd.

Total HP interest= HP price Cash Price = 11096 9000 = 2096Equal instalments = (11096 1000)/4 =2524Answer (a):

Hire purchase Creditor (Grace Ltd)1/1/96 Vehicle 9,0001/1/96 Bank-deposit 1,000 31/12 HP Interest 800 (9000-1000)*10%31/12 Bank-instalment 2,524 31/12 Balance c/d 6,2769,8009,800Hire Purchase Interest31/12/96 HP Creditor 80031/12/96 P/L 800

Balance Sheet as at 31 Dec (Extract)Fixed Assets96VehicleLess Pro for Dep

Current LiabilitiesHP Creditor9000900810018962524-628Long Term LiabilitiesHP Creditor43806276-1896

Hire purchase Creditor (Grace Ltd)1/1/96 Vehicle 9,0001/1/96 Bank-deposit 1,000 31/12 HP Interest 800 31/12 Bank-instalment 2,524 31/12 Balance c/d 6,2769,8009,8001/1/97 Balance b/d 6,27631/12 HP Interest (6276*10%) 62831/12 Bank-instalment 2,524 6,90431/12 Balance 4,3806,904Hire Purchase Interest31/12/97 HP Creditor 62831/12/97 P/L 628

Balance Sheet as at 31 Dec (Extract)Fixed Assets96VehicleLess Pro for Dep

Current LiabilitiesHP Creditor90009008100979000180072002086Long Term LiabilitiesHP Creditor189643802524-4382294

4380-2086

Hire purchase Creditor (Grace Ltd)1/1/96 Vehicle 9,000 1/1/96 Bank-deposit 1,000 31/12 HP Interest 800 31/12 Bank-instalment 2,524 31/12 Balance c/d 6,2769,8009,8001/1/97 Balance b/d 6,27631/12 Hp Interest 62831/12 Bank-instalment 2,524 6,90431/12 Balance 4,3806,9041/1/98 Balance b/d 4,38031/12 HP interest(4380*10%) 43831/12 Bank-instalment 2,524 31/12 Balance 2,2944,8184,818Hire Purchase Interest31/12/98 HP Creditor 43831/12/98 P/L 438

Balance Sheet as at 31 Dec (Extract)Fixed Assets96VehicleLess Pro for Dep

Current LiabilitiesHP Creditor900090081001896979000900098180027007200630020862294Long Term LiabilitiesHP Creditor438022942524-230-2294-2294

Hire purchase Creditor (Grace Ltd)1/1/96 Vehicle 9,0001/1/96 Bank-deposit 1,000 31/12 HP Interest 800 31/12 Bank-instalment 2,524 31/12 Balance c/d 6,2769,8009,8001/1/97 Balance b/d 6,27631/12 Hp Interest 62831/12 Bank-instalment 2,524 6,90431/12 Balance 4,3806,9041/1/98 Balance b/d 4,38031/12 HP interest(4380*10%) 43831/12 Bank-instalment 2,524 31/12 Balance 2,2944,8184,8181/1/99 Balance b/d 229431/12 HP interest(2294*10%) 23031/12 Bank-instalment 2,524 25242524Hire Purchase Interest31/12/99 HP Creditor 23031/12/99 P/L 230

Balance Sheet as at 31 Dec (Extract)Fixed Assets96VehicleLess Pro for Dep

Current LiabilitiesHP Creditor90009008100189697900090009000989918002700360072006300540020862294-Long Term LiabilitiesHP Creditor43802294--

Interest Suspense MethodInterest is recorded all together at the beginning of hire purchase agreement and charge proportionally to the profit and loss account every year.

Interest Suspense Method:

Dr Fixed assetsDr HP Interest SuspenseCr HP CreditorWith the cash price of assetsWith total hire purchase interestWith the hire purchase price(at the date of purchase) Dr HP CreditorCr BankWith deposit and installments paidDr HP InterestCr HP Interest SuspenseWith hire purchase interest accrued for the current year (at the year end)Dr Profit and LossCr HP InterestWith the amount of hire purchase interest transferred to current years profit and loss account.Dr Profit and LossCr Provision for depreciationAnnual depreciation charged based on full cash price of the asset.

Example Refer to textbook P.24

Example 6ABC Ltd. purchased a vehicle from Grace Ltd. on 1 Jan 1996 on HP agreement. The details were as followsCash price$9000Down payment$1000HP Price$11096Nominal rate of interest10% on outstanding balanceFour equal annual instalmentsFirst due31 Dec 1996Depreciation10% on costUsing (a) the progress interest charge system and (b) interest suspense method, show transactions in books of ABC Ltd.

Answer (b):Total HP interest= HP price Cash Price = 11096 9000 = 2096Equal instalments = (11096 1000)/4 =2524

Hire purchase Creditor (Grace Ltd)1/1/96 Vehicle 9,0001/1/96 Bank-deposit 1,000 31/12 Bank-instalment 2,524 31/12 Balance c/d 75729,8009,8001/1/96 HP Interest Suspense 2096 (11096-9000)Hire Purchase Interest31/12/96 HP suspense 80031/12/96 P/L 800HP Interest Suspense

31/12/96 HP Interest 800 (9000-1000)*10%1/1/96 HP Creditor 209631/12/96 Bal c/d 1296 2096 2096

Current LiabilitiesHP CreditorBalance Sheet as at 31 Dec (Extract)96Long Term LiabilitiesHP CreditorLess HP interest suspense25246281896Less HP interest suspense504866843807572-2524(7572-1296)*10%1296-628

Hire purchase Creditor (Grace Ltd)1/1/96 Vehicle 9,0001/1/96 Bank-deposit 1,000 31/12 Bank-instalment 2,524 31/12 Balance c/d 75729,8009,8001/1/97 Balance b/d 757231/12 Bank-instalment 2,524 6,90431/12 Balance c/d 50486,9041/1/96 HP Interest Suspense 2096

HP Interest Suspense

31/12/96 HP Interest 800 (9000-1000)*10%1/1/96 HP Creditor 2096 31/12/96 Bal c/d 1296 2096 2096 31/12/97 HP Interest 628 (7572-1296)*10%1/1/97 Bal b/d 1296 2096 2096 31/12/97 Bal c/d 668 Hire Purchase Interest31/12/97 HP Creditor 62831/12/98 P/L 628

Current LiabilitiesHP CreditorBalance Sheet as at 31 Dec (Extract)9697Long Term LiabilitiesHP CreditorLess HP interest suspense2524628252443818962086Less HP interest suspense50482524668230438022945048-2524(5048-668)*10%668-438

Hire purchase Creditor (Grace Ltd)1/1/96 Vehicle 9,0001/1/96 Bank-deposit 1,000 31/12 Bank-instalment 2,524 31/12 Balance c/d 75729,8009,8001/1/97 Balance b/d 757231/12 Bank-instalment 2,524 6,90431/12 Balance c/d 50486,9041/1/98 Balance b/d 504831/12 Bank-instalment 2,524 31/12 Balance c/d 25244,8184,8181/1/96 HP Interest Suspense 2096

HP Interest Suspense

31/12/96 HP Interest 800 (9000-1000)*10%1/1/96 HP Creditor 2096 31/12/96 Bal c/d 1296 2096 2096 31/12/97 HP Interest 628 (7572-1296)*10%1/1/97 Bal b/d 1296 2096 2096 31/12/97 Bal c/d 668 31/12/98 HP Interest 438 (5048-668)*10%1/1/98 Bal b/d 6682096 2096 31/12/98 Bal c/d 230 Hire Purchase Interest31/12/98 HP Creditor 43831/12/98 P/L 438

Current LiabilitiesHP CreditorBalance Sheet as at 31 Dec (Extract)969798Long Term LiabilitiesHP CreditorLess HP interest suspense252462825242524438230189622942086Less HP interest suspense50482524668230--43802294-2524-2524(2524-230)*10%

230-230

Hire purchase Creditor (Grace Ltd)1/1/96 Vehicle 9,0001/1/96 Bank-deposit 1,000 31/12 Bank-instalment 2,524 31/12 Balance c/d 75729,8009,8001/1/97 Balance b/d 757231/12 Bank-instalment 2,524 6,90431/12 Balance c/d 50486,9041/1/98 Balance b/d 504831/12 Bank-instalment 2,524 31/12 Balance c/d 25244,8184,8181/1/99 Balance b/d 252431/12 Bank-instalment 2,524 252425241/1/96 HP Interest Suspense 2096

HP Interest Suspense

31/12/96 HP Interest 800 (9000-1000)*10%1/1/96 HP Creditor 2096 31/12/96 Bal c/d 1296 2096 2096 31/12/97 HP Interest 628 (7572-1296)*10%1/1/97 Bal b/d 1296 2096 2096 31/12/97 Bal c/d 668 31/12/98 HP Interest 438 (5048-668)*10%1/1/98 Bal b/d 6682096 2096 31/12/98 Bal c/d 230 31/12/98 HP Interest 230 (5048-668)*10%1/1/99 Bal b/d 230Hire Purchase Interest31/12/99 HP Creditor 23031/12/99 P/L 230

Current LiabilitiesHP CreditorBalance Sheet as at 31 Dec (Extract)96979899Long Term LiabilitiesHP CreditorLess HP interest suspense252462825242524-438230-189622942086-Less HP interest suspense50482524668230----43802294--

B. Termination of a Hire Purchase AgreementThe buyer can terminate the hire purchase agreement earlier by paying balance earlier than the last installment date. However, the buyer may also be forced to terminate the agreement earlier if the asset is scrapped due to its use. Upon the termination of a hire purchase agreement, a number of entries should be made in the books. The accounting treatments differ, depending on which method is used to record hire purchase interest.

Progress interest charge systemSummary of procedures

Dr HP creditorCr BankWith the last payment to the HP creditorDr HP interestCr HP creditorWith the HP interest and penalty charges for early termination of the hire purchase contractDr DisposalCr AssetWith the cost of the assetDr Provision for depreciationCr DisposalTransferring related depreciation provision to the disposal accountDr BankCr DisposalWith the insurance claim for the disposal (if any)Dr Profit and LossCr DisposalWith the loss on the disposal (Reverse the entries for a profit on disposal)

Example 7

Example 7 Cash Price$5000Prov for dep$3200

( A full year dep is charged in the year of purchase, but none in the year of disposal)HP creditor on 1 Jan 1996$1800Instalments$250(monthly)Interest $50The car was involved in an accident in May 1996 resulting in a total write off, and the sum of $1000 was received from the insurnance company.All instalments up to and including 31 May were paid.A payment of $930 was made on 30 June 1996 in full settlement

HP Creditor1996 $ 1996 $May 31 Bank instalment 1250 ($250*5)Jan 1 Bal b/f 1800Dec 31 HP interest 300 ($50*6)June30 Bank-settlement 930Dec 31 HP interest -penalty 802180 2180

HP interest1996 $ 1996 $Dec 31 HP Creditor (300+80) 380 Dec 31 P/L 380

Disposal of Vehicle1996 $ 1996 $Jun 30 Vehicle 5000Dep - VehicleVehicle1996 $ 1996 $1996 $ 1996 $Jan b/f 5000Jun 30 Disposal 5000Jan 1 B/f 3200Jun 30 Disposal 3200Jun 30 Dep 3200Jun 30 Bank - insurance 1000Dec 31 P/L - loss 8005000 5000

Interest suspense methodSummary of procedures

Dr HP CreditorCr BankWith the last payment to the HP creditorDr HP interestCr HP interest suspenseWith the HP interest for the current yearDr HP CreditorCr DisposalWith any outstanding balance in the HP creditor accountDr DisposalCr HP Interest suspenseWith any outstanding balance in the HP interest suspense accountDr DisposalCr AssetWith the cost of the assetDr Prov. for Depn.Cr DisposalTransferring the related depreciation provision to the disposal accountDr Bank Cr DisposalWith the insurance claim for the disposal (if any)Dr Profit and LossCr DisposalWith the loss on the disposal (Reverse the entries for a profit on disposal)

Example 8

Example 8 Cash Price$5000Prov for dep$3200

( A full year dep is charged in the year of purchase, but none in the year of disposal)HP creditor on 1 Jan 1996$2250Instalments$250(monthly)Interest $50HP interest suspense$450The car was involved in an accident in May 1996 resulting in a total write off, and the sum of $1000 was received from the insurnance company.All instalments up to and including 31 May were paid.A payment of $930 was made on 30 June 1996 in full settlement

HP Creditor1996 $ 1996 $May 31 Bank instalment 1250 ($250*5)Jan 1 Bal b/f 2250June30 Bank-settlement 9302250 2250

HP interest1996 $ 1996 $Dec 31 HP Creditor 300Dec 31 P/L 300Jun 30 Disposal 70

HP interest suspense1996 $ 1996 $Jan 1 Bal/f 450 Jun 30 HP interest(60*5) 300Jun 30 Disposal 150 450 450

Disposal of Vehicle1996 $ 1996 $Jun 30 Vehicle 5000Dep - VehicleVehicle1996 $ 1996 $1996 $ 1996 $Jan b/f 5000Jun 30 Disposal 5000Jan 1 B/f 3200Jun 30 Disposal 3200Jun 30 Dep 3200Jun 30 Bank - insurance 1000 Dec 31 P/L - loss 8805000 5000Jun 30 HP Creditor 70Jun 30 HP interest Suspense 150Include the penalty charge $80For early termination of HP

Sellers Book

2 Method of HP Interest TreatmentProfit Suspense Method

(ii) HP Interest Suspense Method

*3 method of HP InterestApportionment

Straight-line methodActuarial methodSum-of-digit method

= 4 Version

Hire Purchase ProfitHP profit= HP price Cash selling PriceGross profit=Cash price-Cost of good soldTotal Profit=HP profit+Gross profit

Interest Suspense MethodThe characteristics of the interest suspense method are:

The hire purchase sale is recorded at the cash priceProfit is recognized immediately in the year of sale.The gross profit and interest income are accounted for separately.Interest income is allocated over the period of the hire purchase agreement on a suitable basis.Only the amount of hire purchase interest receivable in the current period is taken into account.

Summary of procedures

Dr HP debtorsDr HP SalesWith the cash selling price of the sale.Dr HP debtorCr HP interest suspenseWith the total HP interestDr Bank Cr HP debtorsWith the deposit and installments receivedDr HP interest suspenseCr HP interest / P&L(income)With the hire purchase interest receivable for the current periodDr HP SalesCr HP TradingTransfer the HP sales to HP tradingaccount

Example 9

Example 9A company selling on HP has the following details:The interest is accrued evenly throughout the period of HP agreementThe gross profit on the sales is recognized in the year of salesSales volume2 unitsDate of sale1 Jan 1996Cash price$1200HP price$2000Cost$1000Down paymentNILInstalments$250*8 quarterlyFirst due31 Mar 1996

HP Debtors1996 $ 1996 $Jan 1 HP Sales ($1200*2) 2400Jan 1 Interest suspense 1600 (2000-1200)*2Dec 31 Bank-instalment ($250*4*2) 2000Dec 31 Bal c/d 2000 4000 4000

HP Sales1996 $ 1996 $Dec 31 HP Trading 2400Jan 1 HP Debtors 2400HP interest suspense1996 $ 1996 $ Dec 31 HP interest received (2000-1200)*4/8*2 800Jan 1 HP Debtors 1600Dec 31 Bal c/d 8001600 1600Cash price

HP interest received1996 $ 1996 $Dec 31 P/L 800 Jan 1 HP int suspense 800

Trading and profit and loss account for the year ended (Extract)Sales (cash price) $962400Less: cost of goods sold2000400HP Gross profitAdd: HP interest received800Balance Sheet as at 31 Dec (Extract) $ 96Current AssetsHP DebtorsLess Interest suspense20008001200

HP Debtors1996 $ 1996 $Jan 1 HP Sales ($1200*2) 2400Jan 1 Interest suspense 1600 (2000-1200)*2Dec 31 Bank-instalment ($250*4*2) 2000Dec 31 Bal c/d 20004000 40001997 1997Jan 1 Bal b/d 2000 Dec 31 Bank- instalment 2000

HP interest suspense1996 $ 1996 $Dec 31 HP interest received (2000-1200)*4/8*2 800Jan 1 HP Debtors 1600Dec 31 Bal c/d 8001600 16001997 1997Dec 31 HP interest 800 received (2000-1200)*4/8*2Jan 1 Bal b/d 800Interest received1996 $ 1996 $Dec 31 HP interest suspense 800Dec 31 P/L 800

Trading and profit and loss account for the year ended (Extract)Sales (cash price)$ $9697$ $2400Less: cost of goods sold2000400HP Gross profitAdd: HP interest received800---800Balance Sheet as at 31 Dec (Extract) $ $9697Current AssetsHP DebtorsLess Interest suspense20008001200---

B. Profit suspense methodThe profit suspense method has the following characteristics:

The hire purchase sale is recorded at the hire purchase price.The profit is recognized in proportion of the amount collected.The gross profit and the interest income are not accounted for separately.

Summary of procedures:

Dr HP DebtorsDr HP SalesWith the hire purchase price.Dr BankCr HP DebtorsWith the deposit and instalments receivedDr HP SalesCr HP TradingTransfer the HP Sales to HP Trading a/cDr HP TradingCr Provision for Unrealized profitWith the increase in the provision for unrealized profit.*Transfer the unearned total profit ( unearned HP profit & unearned GP)Dr Provision for Unrealized profitCr HP tradingWith the decrease in the provision for unrealized profit.* Transfer the unearned total profit (unearned HP profit & unearned GP)

Provision for unrealized profit= Total Profit * instalments not yet received HP price

= (HP price Cost) * Instalments not yet received HP price

Example 10

Example 10A company selling on HP has the following details:The gross profit on the sales is recognized on the basis of the cash receivedSales volume2 unitsDate of sale1 Jan 1996Cash price$1200HP price$2000Cost$1000Down paymentNILInstalments$250*8 quarterlyFirst due31 Mar 1996

Required:Account prepared according to the following assumptions:

All instalments were received for the years ended 31 Dec

1996 and 1997

(b) All instalments were received for the years ended 31 Dec 1996 and 1997, except one in arrears as at 31 Dec 1996 which was received in 1997

HP Debtors1996 $ 1996 $Jan 1 HP Sales ($2000*2) 4000Dec 31 Bank-instalment ($250*4*2) 2000Dec 31 Bal c/d 20004000 4000HP Price(a) Provision for unrealized profit1996 $ 1996 $Dec 31 Bal c/d 1000 ($4000-2000)*2000/4000Dec 31 HP Trading 1000

Trading and profit and loss account for the year ended (Extract)Sales (HP price)$ $964000Less: cost of goods sold20001000Gross profitBalance Sheet as at 31 Dec (Extract) 96Current AssetsHP DebtorsLess Provision for unreaslised profit200010001000Less:Provision for unrealised profit 1000

HP Debtors1996 $ 1996 $Jan 1 HP Sales ($2000*2) 4000Dec 31 Bank-instalment ($250*4*2) 2000Dec 31 Bal c/d 20004000 40001997 1997Jan 1 Bal b/d 2000 Dec 31 Bank- instalment 2000HP Price(a) Provision for unrealized profit1996 $ 1996 $Dec 31 Bal c/d 1000 ($4000-2000)*2000/4000Dec 31 HP Trading 10001997 $ 1997 $Dec 31 HP Trading 1000Dec 31 Bal b/d 1000Dec 31 Bal c/d 0 ($4000-2000)*0/4000

1000 1000

Trading and profit and loss account for the year ended (Extract)Sales (HP price)$ $9697$ $4000Less: cost of goods sold2000Gross profit-Balance Sheet as at 31 Dec (Extract) $ $9697Current AssetsHP DebtorsLess Provision for unrealized profit200010001000---Less:Increase Provision for unrealized profit 10001000Add: Decrease in prov.for unrealized profit10001000

HP Debtors1996 $ 1996 $Jan 1 HP Sales ($2000*2) 4000Dec 31 Bank-instalment ($250*4*2-250) 1750Dec 31 Bal c/d 22504000 4000HP Price(b) Provision for unrealized profit1996 $ 1996 $Dec 31 Bal c/d 1125 ($4000-2000)*2250/4000Dec 31 HP Trading 1125

Trading and profit and loss account for the year ended (Extract)Sales (HP price)$ $964000Less: cost of goods sold2000875Gross profitBalance Sheet as at 31 Dec (Extract) 96Current AssetsHP DebtorsLess Provision for unrealized profit225011251125Less:Provision for unrealized profit 1125

HP Debtors1996 $ 1996 $Jan 1 HP Sales ($2000*2) 4000Dec 31 Bank-instalment ($250*4*2-250) 1750Dec 31 Bal c/d 22504000 40001997 1997Jan 1 Bal b/d 2250Dec 31 Bank- instalment 2250HP Price(b) Provision for unrealized profit1996 $ 1996 $Dec 31 Bal c/d 1125 ($4000-2000)*2250/4000Dec 31 HP Trading 11251997 $ 1997 $Dec 31 HP Trading 1125Dec 31 Bal b/d 1125Dec 31 Bal c/d 0 ($4000-2000)*0/4000

1125 1125

Trading and profit and loss account for the year ended (Extract)Sales (HP price)$ $9697$ $4000Less: cost of goods sold2000Gross profit-Balance Sheet as at 31 Dec (Extract) $ $9697Current AssetsHP DebtorsLess Provision for unreaslised profit22501125---Less:IncreaseProvision for unrealised profit 11251125Add: Decrease in prov.for unreasised profit87511251125

C. A combination of the 2 methods

The combination of 2 methods has the following characteristics:The hire purchase sale is recorded at the cash price.The profit is recognized in proportion of the amount collected.The gross profit and the interest income are accounted for separately.Interest income is allocated over the period of the hire purchase agreement on a suitable basis

Summary of procedures

Dr HP debtorsDr HP SalesWith the cash price.Dr BankCr HP debtorWith the deposit receivedDr BankCr HP debtorsCr Interest receivableWith the installments received.With the capital part of the installments.With the interest receivable for the current periodDr HP tradingCr Provision for Unrealized profitWith the increase in the provision for unrealized profit. (Reverse the entries for a decrease in the provision for unrealized profit)

Provision for unrealised profit

= (Cash price Cost ) * Instalments not yet received Cash Price

Example 11

Example 11A company selling on HP has the following details:The interest is accrued evenly throughout the period of HP agreementThe gross profit on the sales is recognized in the accounts on the basis of the amounts receivedSales volume2 unitsDate of sale1 Jan 1996Cash price$1200HP price$2000Cost$1000Down paymentNILInstalments$250*8 quarterlyFirst due31 Mar 1996

Interest per instalment= ($2000-1200) 8= $100Instalment = Capital + Interest$250 = $150 + $100

HP Debtors1996 $ 1996 $Jan 1 HP Sales ($1200*2) 2400Dec 31 Bank-instalment ($250-100)*4*2 1200Dec 31 Bal c/d 12004000 4000CashPriceHP Interest Receivable1996 $ 1996 $Dec 31 P/L 800Dec 31 Bank ($100*4*2) 800Provision for unrealized profit1996 $ 1996 $Dec 31 Bal c/d 200 ($2400-2000)*1200/2400Dec 31 HP Trading 200

Trading and profit and loss account for the year ended (Extract)Sales (cash price)$ $962400Less: cost of goods sold2000200HP profitBalance Sheet as at 31 Dec (Extract) 96Current AssetsHP Debtors1200Less:Provision for unrealised profit 200Add: Interest received 800

HP Debtors1996 $ 1996 $Jan 1 HP Sales ($1200*2) 2400Dec 31 Bank-instalment ($250-100)*4*2 1200Dec 31 Bal c/d 12004000 4000CashPriceHP Interest Receivable1997 $ 1997 $Dec 31 P/L 800Dec 31 Bank ($100*4*2) 8001997 1997Jan 1 Bal b/d 1200Dec 31 Bank- instalment 1200

Provision for unrealized profit1996 $ 1996 $Dec 31 Bal c/d 200 ($2400-2000)*1200/2400Dec 31 HP Trading 2001997 $ 1997 $Dec 31 Bal b/d 200Dec 31 HP Trading 200Dec 31 Bal c/d 0 ($2400-2000)*0/2400200 200

Trading and profit and loss account for the year ended (Extract)Sales (cash price)$ $9697$ $2400Less: cost of goods sold2000Gross profit-Balance Sheet as at 31 Dec (Extract) $ $9697Current AssetsHP Debtors1200-Less:IncreaseProvision for unrealised profit 200200Add: Decrease in prov.for unreasised profit200200Add: Interest Received 800800

Repossession

RepossessionIt may be happen that hire purchase debtors cannot make all of the payments required under the agreement.Once the hire purchase debtor stops paying the instalments, the seller can take away the goods. This is called repossession.

2.42.

Dr RepossessionCr HP CreditorWith the outstanding balance for the particular HP debtorsInterest suspense methodDr HP interest suspenseCr Repossession

Profit suspense methodDr Provision for unrealized profitCr Repossession

The combined methodDr RepossessionCr interest Receivable With the HP interest not yet received

With the outstanding provision transferred

With the amount of accrued HP interestDr TradingCr RepossessionWith the value of the repossessed item which is taken back into stockDr BankCr RepossessionWith the insurance claim or any sale proceeds for the repossessed item.Dr Profit and lossCr RepossessionWith the loss on the repossession(Reverse the entries for a profit on repossession)

The value of the repossessed item Cost * Outstanding balance of the particular HP HP price debtor ( repossessed items)=

(a) Using interest suspense method

Example 12 (a)A company selling on HP has the following details:The interest is accrued evenly throughout the period of HP agreementThe gross profit on the sales is recognized in the year of salesSales volume2 unitsDate of sale1 Jan 1996Cash price$1200HP price$2000Cost$1000Down paymentNILInstalments$250*8 quarterlyFirst due31 Mar 1996All the instalments were received on the due dates, except that payments on one of the items have been default since 31 Mar 1997. The repossessed item has been taken back into stock

HP Debtors1997 $ 1997 $2000 2000Jan 1 Bal b/d 2000 Dec 31 Bank- instalment 1000Mar 31 Repossession 1000HP interest suspense1997 $ 1997 $800 800Dec 31 HP interest 400 received (2000-1200)*4/8*1Jan 1 Bal b/d 800Mar 31 Repossession 400Repossession1997 $ 1997 $Mar 31 HP Debtors 1000Mar 31 HP int. suspense 400 ($800-$400)Dec 31 HP Trading 500($1000*1000/2000)Value of Repossessed itemsDec 31 P/L-loss on repossession 1001000 1000

(b) Using profit suspense method

Example 12(b)A company selling on HP has the following details:The gross profit on the sales is recognized on the basis of the cash receivedSales volume2 unitsDate of sale1 Jan 1996Cash price$1200HP price$2000Cost$1000Down paymentNILInstalments$250*8 quarterlyFirst due31 Mar 1996All instalments were received on the due dates, except that payments on one of the items have been in default since 31 Mar 1997. The repossessed item has been taken back into stock.

HP Debtors1997 $ 1997 $Jan 1 Bal b/d 2000 Dec 31 Bank- instalment 1000Mar 31 Repossession 1000Repossession1997 $ 1997 $Mar 31 HP Debtors 1000Mar 31 Prov. for unrealised 500 profit (2000-1000)*1000/2000 Dec 31 HP Trading 500 ($1000*1000/2000)1000 1000Provision for unrealised profit1997 $ 1997 $ 800 800Dec 31 HP Trading 500 Jan 1 Bal b/d 1000Mar 31 Repossession 500Value of Repossessed itemsDec 31 Bal c/d 0 (2000-1000)*0/2000 2000 2000

(c) Using the combined method

Example 12(c)A company selling on HP has the following details:The interest is accrued evenly throughout the period of HP agreementThe gross profit on the sales is recognized in the accounts on the basis of the amounts receivedSales volume2 unitsDate of sale1 Jan 1996Cash price$1200HP price$2000Cost$1000Down paymentNILInstalments$250*8 quarterlyFirst due31 Mar 1996

All the instalments were received on the due dates, except that payments on one of the item has been in default since 31 Mar 1997

The seller repossessed the goods on the same date (31 Mar 1997)as that the HP debtor defaulted on the paymentThe seller repossessed the goods on 31 June 1997, after the HP debtor defaulted on the payment

(1)HP Debtors1997 $ 1997 $1200 1200Jan 1 Bal b/d 1200 Dec 31 Bank- instalment 600 ($250-100)*4Mar 31 Repossession 600Interest receivable1997 $ 1997 $Dec 31 Bank ($100*4) 400Dec 31 P/L 400Repossession1997 $ 1997 $Mar 31 HP Debtors 600 $1200-(250-100)*4Dec 31 HP Trading 500($1000*1000/1200)Value of Repossessed itemsDec 31 P/L-loss on repossession 100600 600

(2)1997 $ 1997 $1200 1200Jan 1 Bal b/d 1200 Dec 31 Bank- instalment 600 ($250-100)*4June30 Repossession 600Interest receivable1997 $ 1997 $Dec 31 Bank ($100*4) 400Dec 31 P/L 600Repossession1997 $ 1997 $June 30 HP Debtors 600 $1200-(250-100)*4Dec 31 HP Trading 500($1000*1000/1200)Value of Repossessed itemsDec 31 P/L-loss on repossession 300600 600HP DebtorsJune 30 Repossession 200 ($100*2)June 30 Interest 200 receivable600 600

Hire Purchase Trading and Profit and loss account

Interest suspense method and the combined method

Profit suspense method

ABC Ltd. Purchased a vehicle from Grace ltd. On Jan 1996 on hire purchase agreement. The details were as follows:

Cash price $9,000HP price $11,096Down payment $1,000Instalment 4 equal annual instalmentsFirst due 31 December 1996Interest 10% on outstanding balance

Depreciation 10% on cost

Using (a) the progress interest charge system and (b) interest suspense method

2.42.