Hire Purchase and Installment Sale Transactions | CMA Inter Syllabus

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Hire Purchase and Installment Sale Transactions

It is not always possible by a purchaser to meet up the higher demand for goods due to immediate cash payment. To meet this demand the concept of Hire Purchase is very popular in the market. Under this system the purchaser (Hirer) pays the entire amount in staggered way viz. monthly, quarterly or yearly with some interest. Under this system the goods are sold with the following conditions:

Possession of goods is delivered to a hirer but the title to the goods (Ownership) are transferred only when the agreed sum (Hire Purchase price) is paid by the hirer.

Such hirer has a right to terminate the agreement at any time before the property so passes. That means he has the option to return the goods in which case he need not pay installments falling due thereafter. However, the hirer cannot recover the sums already paid as such sums legally represent hire charges of the goods in question.

The hire-purchaser, during that period of possession of goods, cannot damage, destroy, pledge or sell such goods. He is supposed to take all such care of goods as a prudent person does in his own goods.

In case of Installment Sale, it is not only the possession of goods but also the ownership in goods is transferred to the buyer immediately at the time of agreement.

Further, in installment system if the buyer stops the payment of dues, then he does not have the right of seizing his goods. The differences between installment sale and hire-purchase are as below:

Particulars	Hire Purchase	Installment Sale
Ownership	Stipulates the time at which the ownership passes to the buyer. It is usually on the payment of last installment.	Ownership passes at the time of sale.
Default in making payment	Seller can repossess the goods. In that case the installment so far paid is treated to be Hiring charges.	Seller does not have any other right except the right of suing the buyer for the non payment of price.
Right of sale or other wise	No right to sale or otherwise transfer the goods since the legal position of the hirer is bailee.	Right to sale or otherwise transfer the goods.
Loss or damages to the goods.	Any loss occurring to goods has to be borne by the seller if the buyer takes reasonable care.	Any loss occurring to goods has to be borne by the buyer

Situation – I : when rate of interest, total cash price and in stallments are given

Illustration 1

Mr. Rana purchases a car on Hire Purchase system on 01.01.2021. The Total cash price of the car is ₹ 4,50,000 payable ₹ 90,000 down and three instalments of ₹ 1,70,000, ₹ 1,50,000 and ₹ 1,08,460 payable at the end of lst, 2nd and 3rd respectively. Interest is charged at 10% p.a.

You are required to calculate interest paid with each instalment. 

Solution: 

Interest paid with each instalment 

Year	Opening Balance of Cash Price (₹)	Instalments (₹)	Payment towards Principal/Cash Price (₹)	Payment towards Interest (₹)	Closing Balance of Cash Price (₹)
01.01.21	4,50,000	90,000	90,000	0	3,60,000
31.12.21	3,60,000	1,70,000	1,34,000	36,000	2,26,000
31.12.22	2,26,000	1,50,000	1,24,400	22,600	98,600
31.12.23	98,600	1,08,460	98,600	9,860	0

Situation – II : When rate of interest and installments are given but total cash price is not given

 Illustration 2

X purchased a T.V on hire-purchase system. As per terms he is required to pay ₹ 3000 down, ₹ 4000 at the end of first year, ₹ 3000 at the end of second year, and ₹ 5000 at end of third year. Interest is charged at 12% p.a.

You are required to calculate total cash price of T.V and interest paid with each installment.

Solution:

	Installment	Analysis of Instalments
		Interest (₹)	Cash Price (₹)
3rd Instalment
(-) Interest (12/112 × 5,000)	5,000
	536
Balance of Cash Price	4,464	536	4,464
(+) 2nd Instalment	3,000
	7,464
(-) Interest (12/112 × 7,464)	800	800	2,200
Balance of Cash Price	6,664
(+) 1st Instalment	4,000
	10,664
(-) Interest (12/112 × 10,664)	1,143	1,143	2,857
Balance of Cash Price	9,521
(+) Down Payment Total Cash Price	3,000	-	3,000
	12,521	2,479	12,521

 Situation – III : When only installments are given, but cash price and rate of interest are not given

Illustration 3

X & Co. purchased a Motor car on April 1, 2019 on hire-purchase paying ₹ 60,000 cash down and balance in four annual installments of ₹ 55,000, ₹ 50,000, ₹ 45000 and ₹ 40,000 each Installment comprising equal amount of cash price at the end of each accounting period. You are required to calculate total cash price and amount of interest in each Installment.

Solution:

Hire-purchase Price

Down Payment	60,000
1st installment	55,000
2nd installment	50,000
3rd installment	45,000
4th installment	40,000
Total	2,50,000

As each installment comprises equal amount of cash price the differences in installment amounts are due to interest amount only. Assuming X is the amount of Cash Price in each installment and I is the amount of interest. Thus for the installments, starting from last installment, we have the following equations:

(i) X + I	= 40,000
(ii) X + 2I	= 45,000
(iii) X + 3I	= 50,000
(iv) X + 4I	= 55,000

Amount of Interest	Present value
₹ 1	₹ 2.7232
₹ 15,000	₹ (15,000*27,232)/1 = ₹ 40,848

∴ Cash Price = ₹ 40,848 + ₹ 15,000 (down) = ₹ 55,848.

Accounting Treatment

Accounting treatment in the books of buyer is presented in below :

In the Books of the Hire-Purchaser

The following methods are followed:

(1) Cash Price Method

(2) Interest Suspense Method

 Cash Price Method:

Particulars		Debit (₹)	Credit (₹)
1	Hire Purchase A/c	xxxx
	To, Hire Vendor A/c [Cash price]		xxxx
2	Hire Vendor A/c	xxxx
	To, Bank A/c [Down payment]		xxxx
3	Interest A/c	xxxx
	To, Hire Vendor A/c		xxxx
4	Hire Vendor A/c	xxxx
	To, Bank A/c [Installment amount]		xxxx
5	P/L A/c	xxxx
	To, Interest A/c		xxxx
	To, Depreciation A/c		xxxx

 Interest Suspense Method:

Particulars		Debit (₹)	Credit (₹)
1	Hire Purchase Asset A/c [Cash Price]	xxxx
	Interest Suspense A/c [Total Interest]		xxxx
	To, Hire Vendor A/c [H.P price]		xxxx
2	Hire Vendor A/c	xxxx
	To, Bank A/c [Down payment]		xxxx
3	Interest A/c	xxxx
	To, Interest Suspense A/c		xxxx
4	Hire Vendor A/c	xxxx
	To, Bank A/c [Installment amount]		xxxx
5	P/L A/c	xxxx
	To, Interest A/c		xxxx
	To, Depreciation A/c		xxxx

 Illustration 5

On 1.1.2017, Mr. X took delivery from Mr. Y of 5 machines on a hire-purchase system. ₹ 4,000 being paid on delivery and the balance in five installments of ₹ 6,000 each, payable annually on 31st December. The vendor company charges 5% interest p.a. on yearly balances. The cash price of 5 machines was ₹ 30,000. Show the entries (without narration) Assets Account, Mr. Y Account for 5 years assuming that the purchaser charges depreciation @20% on straight line method.

Solution:

Computation of Interest	(₹000)	(₹000)
Hire-purchase price
Down payment	4
Interest (₹) 6,000 x 5 =	30	34
Less: Cash Price		30
∴ Interest		4

Analysis of Payments of Vendors

Year	Opening Balance of Cash Price (₹000)	Towards Principal (₹000)	Towards Interest (₹000)	Instalment (₹000)	Closing balance of Cash Price (₹000)
01.01.2017	30	4	-	-	26
31.12.2017	26	4.7	1.3	6	21.3
31.12.2018	21.3	4.935	1.065	6	16.365
31.12.2019	16.365	5.182	818	6	11.183
31.12.2020	11.183	5.441	559	6	5.742
31.12.2021	5.742	5.742	258 (bal.fig.)	6	Nil
			4

In the Books of Mr. X

Journal (without narrations)

				Dr.	Cr.
Date	Particulars		L.F.	(₹)	(₹)
2017	Assets A/c	Dr.		30,000
Jan.1	To Mr. Y A/c				30,000
	Mr. Y A/c.	Dr.		4,000
	To Bank A/c				4,000
Dec. 31.	Interest A/c.	Dr.		1,300
	To Mr. Y A/c.				1,300
	Mr. Y A/c.	Dr.		6,000
	To Bank A/c.				6,000
	Depreciation A/c.	Dr.		6,000
	To Assets A/c.				6,000
	Profit & Loss A/c.	Dr.		7,300
	To Interest A/c.				1,300
	To Depreciation A/c.				6,000
2018
Dec. 31.	Interest A/c	Dr.		1,065
	To Mr. Y A/c.				1,065
	Mr. Y A/c.	Dr.		6,000
	To Bank A/c.				6,000
	Depreciation A/c.	Dr.		6,000
	To Assets A/c.				6,000
	Profit & Loss A/c.	Dr.		7,065
	To Interest A/c.				1,065
	To Depreciation A/c.				6,000
2019
Dec. 31.	Interest A/c.	Dr.		818
	To Mr. Y A/c.				818
	Mr. Y A/c.	Dr.		6,000
	To Bank A/c.				6,000
	Depreciation A/c.	Dr.		6,000
	To Assets A/c.				6,000
	Profit & Loss A/c.	Dr.		6,818
	To Interest A/c.				818
	To Depreciation A/c.				6,000
2020
Dec. 31.	Interest A/c.	Dr.		559
	To Mr. Y A/c.				559
	Mr. Y A/c.	Dr.		6,000
	To Bank A/c.				6,000
	Depreciation A/c.	Dr.		6,000
	To Assets A/c.				6,000
	Profit & Loss A/c.	Dr.		6,559
	To Interest A/c.				559
	To Depreciation A/c.				6,000
2021
Dec. 31.	Interest A/c.	Dr.		258
	To Mr. Y A/c.				258
	Mr. Y A/c.	Dr.		6,000
	To Bank A/c.				6,000
	Depreciation A/c	Dr.		6,000
	To Assets A/c.				6,000
	Profit & Loss A/c.	Dr.		6,258
	To Interest A/c.				258
	To Depreciation A/c.				6,000

Asset Account

Dr.					Cr.
Date	Particulars	(₹)	Date	Particulars	(₹)
2017			2017
Jan. 1.	To Mr. Y A/c.	30,000	Dec. 31.	By Depreciation A/c.	6,000
				By Balance c/d.	24,000
		30,000			30,000
2018			2018
Jan. 1.	To Balance b/d.	24,000	Dec. 31.	By Depreciation A/c.	6,000
				By Balance c/d.	18,000
		24,000			24,000
2019			2019
Jan. 1.	To Balance b/d.	18,000	Dec. 31.	By Depreciation A/c.	6,000
				By Balance c/d.	12,000
		18,000			18,000
2020			2020
Jan. 1.	To Balance b/d.	12,000	Dec. 31.	By Depreciation A/c.	6,000
				By Balance c/d.	6,000
		12,000			12,000
2021			2021
Jan. 1.	To Balance b/d.	6,000	Dec. 31.	By Depreciation A/c.	6,000
		6,000			6,000

Note:

It has been observed that 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 based on the simplified approach are not fully compliant with AS 19 “Leases” since loading amount contains both profit as well as interest element.

As both companies and other than companies are involved in Hire Purchase Trading it is necessary to prepare the company accounts in compliance with Accounting Standards as per Companies Act, 2013.

Accordingly it is proposed to follow the methods other than Hire Purchase Trading Account (Debtors) Method and Stock and Debtors Method in case of Companies.

Meaning of Sales Method

Sales method follows a practical approach and practically (of course not technically) treats the hire purchaser as owner of the asset. Under this method, the asset is recorded at full cash price on the basis of ‘substance over form’. This method is more appropriate since the intention all along is to buy the asset.

Journal Entries

The various accounting entries in the books of the hire purchaser and hire vendor are shown below:

Particulars	Hire Purchase	Installment Sale
On transfer of Possession	Asset A/c	Hire Purchaser’s A/c
	To, Hire Vendor’s A/c	To, H.P. Sales A/c
On making Down Payment	Hire Vendor’s A/c	Bank A/c
	To, Bank A/c	To, Hire Purchaser’s A/c
On making Interest due on unpaid balance	Interest A/c	Hire Purchaser’s A/c
	To, Hire Vendor’s A/c	To, Interest A/c
On making payment of Installment	Hire Vendor’s A/c	Bank A/c
	To, Bank A/c	To, Hire Purchaser’s A/c
On providing Depreciation	Depreciation A/c	No Entry
	To, Asset A/c
On closure of Depreciation A/c	Profit & Loss A/c	No Entry
	To, Depreciation A/c
On closure of Interest A/c	Profit & Loss A/c	Interest A/c
	To, Interest A/c	To, Profit & Loss A/c

 Disclosure in Balance Sheet

At the end of each accounting period the balances of relevant accounts appear in the Balance Sheet as shown below:

Disclosure in Balance Sheet

Liabilities	(₹)	Assets	(₹)	Liabilities	(₹)	Assets	(₹)
		Fixed Assets:				Current Assets:
		Asset (at full cash price)	xxx			Hire Purchase Debtors	xxx
		Less: Depreciation till date	xxx
		Less: Balance in Hire Vendor’s Account	xxx
			xxx				xxx

 Illustration 6

On 01.01.19 A purchased five Machines each costing ₹ 1,58,500 each from B Payment was to be made 20% down and the remainder in four equal annual instalments commencing from 31.12.19 with interest at 10% p.a. A writes off depreciation @20% on the diminishing balance.

Give the necessary journal entries and ledger accounts in the books of A and B under Sales Method. Also show how the relevant of items will appear in the Balance Sheet.

Solution:

Journal

	Journal A			Journal B		Dr. (₹)	Cr.(₹)
	01.01.2019
(a)	Machines A/c	Dr.	(a)	A A/c	Dr.	7,92,500
	To B A/c			To HP Sales A/c			7,92,500
(b)	B A/c	Dr.	(b)	Bank A/c	Dr.	1,58,500
	To Bank A/c			To A A/c			1,58,500
	31.12.2019
(c)	Interest A/c	Dr.	(c)	A A/c	Dr.	63,400
	To B A/c			To Interest A/c			63,400
(d)	B A/c	Dr.	(d)	Bank A/c	Dr.	2,21,900
	To Bank A/c			To A A/c			2,21,900
(e)	Depreciation A/c	Dr.	(e)	No Entry		1,58,500
	To Machines A/c						1,58,500
(f)	Profit & Loss A/c	Dr.	(f)	No Entry		1,58,500
	To Depreciation A/c						1,58,500
(g)	Profit & Loss A/c	Dr.	(g)	Interest A/c	Dr.	63,400
	To Interest A/c			To Profit & Loss A/c			63,400
	31.12.2020
(a)	Interest A/c	Dr.	(a)	A A/c	Dr.	47,500
	To B A/c			To Interest A/c			47,500
(b)	B A/c	Dr.	(b)	Bank A/c	Dr.	2,06,050
	To Bank A/c			To A A/c			2,06,050
(c)	Depreciation A/c	Dr.	(c)	No Entry		1,26,800
	To Machines A/c						1,26,800
(d)	Profit & Loss A/c	Dr.	(d)	No Entry		1,26,800
	To Depreciation A/c						1,26,800
(e)	Profit & Loss A/c	Dr.	(e)	Interest A/c	Dr.	47,550
	To Interest A/c			To Profit & Loss A/c			47,550
	31.12.2021
(a)	Interest A/c	Dr.	(a)	A A/c	Dr.	31,700
	To B A/c			To Interest A/c			31,700
(b)	B A/c	Dr.	(b)	Bank A/c	Dr.	1,90,200
	To Bank A/c			To A A/c			1,90,200
(c)	Depreciation A/c	Dr.	(c)	No Entry		1,01,440
	To Machines A/c						1,01,440
(d)	Profit & Loss A/c	Dr.	(d)	No Entry		1,01,440
	To Depreciation A/c						1,01,440
(e)	Profit & Loss A/c	Dr.	(e)	Interest A/c	Dr.	31,700
	To Interest A/c			To Profit & Loss A/c			31,700
	31.12.2022
(a)	Interest A/c	Dr.	(a)	A A/c	Dr.	15,850
	To B A/c			To Interest A/c			15,850
(b)	B A/c	Dr.	(b)	Bank A/c	Dr.	1,74,350
	To Bank A/c			To A A/c			1,74,350
(c)	Depreciation A/c	Dr.	(c)	No Entry		81,152
	To Machines A/c						81,152
(d)	Profit & Loss A/	Dr.	(d)	No Entry		81,152
	To Depreciation A/c						81,152
(e)	Profit & Loss A/c	Dr.	(e)	Interest A/c	Dr.	15,850
	To Interest A/c			To Profit & Loss A/c			15,850

Machines Account

Dr.					Cr.
Date	Particulars	₹	Date	Particulars	₹
01.01.19	To B A/c	7,92,500	31.12.19	By Depreciation A/c	1,58,500
				By Balance c/d	6,34,000
		7,92,500			7,92,500
01.01.20	To Balance b/d	6,34,500	31.12.20	By Depreciation A/c	1,26,800
				By Balance c/d	5,07,200
		6,34,500			6,34,500
01.01.21	To Balance b/d	5,07,200	31.12.21	By Depreciation A/c	1,01,440
				By Balance c/d	4,05,760
		5,07,200			5,07,200
01.01.22	To Balance b/d	4,05,760	31.12.22	By Depreciation A/c	81,152
				By Balance c/d	3,24,608
		4,05,760			4,05,760

B’s Account

Dr.					Cr.
Date	Particulars	₹	Date	Particulars	₹
01.01.19	To Bank A/c [Down Payment]	1,58,500	01.01.19	By Machines A/c	7,92,500
	To Bank A/c[₹1,58,500 + ₹63,400]	2,21,900	31.12.19	By Interest A/c[(₹7,92,500 -₹1,58,500)×10/100]	63,400
	To Balance c/d	4,75,500
		8,55,900			8,55,900
31.12.20	To Bank A/c [₹1,58,500 + ₹47,550]	2,06,050	01.01.20	By Balance b/d	4,75,500
	To Balance c/d	3,17,000	31.12.20	By Interest A/c [₹4,75,500 × 10/100]	47,550
		5,23,050			5,23,050
31.12.21	To Bank A/c [₹1,58,500 + ₹31,700]	1,90,200	01.01.21	By Balance b/d	3,17,000
	To Balance c/d	1,58,500	31.12.21	By Interest A/c [ ₹ 3,17,000 × 10/100]	31,700
		3,48,700			3,48,700
31.12.22	To Bank A/c [₹1,58,500 + ₹15,850]	1,74,350	01.01.22	By Balance b/d	1,58,500
			31.12.22	By Interest A/c[₹1,58,500 × 10/100]	15,850
		1,74,350			1,74,350

An Extract of Balance Sheet of A

Liabilities	1st yr	2nd yr	3rd yr	4th yr	Assets	1st yr	2nd yr	3rd yr	4th yr
					Fixed Assets:
					Machines	7,92,500	7,92,500	7,92,500	7,92,500
					Less: Depreciation till date	1,58,500	2,85,300	3,86,740	4,67,892
					Less: Balance due To B	4,75,500	3,17,000	1,58,500	-
						1,58,500	1,90,200	2,47,260	3,24,608

Ledger Accounts in the books of B

A’s Account

Date	Particulars	₹	Date	Particulars	₹
01.01.19	To Sales A/c	7,92,500	01.01.19	By Bank A/c [Down payment]	1,58,500
31.12.19	To Interest A/c	63,400	31.12.19	By Bank A/c	2,21,900
				By Balance c/d	4,75,500
		8,55,900			8,55,900
01.01.20	To Balance b/d	4,75,500	31.12.20	By Bank A/c	2,06,050
31.12.20	To Interest A/c	47,550	31.12.20	By Balance c/d	3,17,000
		5,23,050			5,23,050
01.01.21	To Balance b/d	3,17,000	31.12.21	By Bank A/c	1,90,200
31.12.21	To Interest A/c	31,700		By Balance c/d	1,58,500
		3,48,700			3,48,700
01.01.22	To Balance b/d	1,58,500	31.12.22	By Bank A/c	1,74,350
31.12.22	To Interest A/c	15,850
		1,74,350			1,74,350

An Extract of Balance Sheet of B

Liabilities	1st yr	2nd yr	3rd yr	4th yr	Assets	1st yr	2nd yr	3rd yr	4th yr
					Current Assets:
					Hire Purchase Debtors – A	4,75,500	3,17,000	1,58,500	-

Default and Repossession

Depending on the number of items repossessed as compared to the number of items sold on hire purchase basis, repossession can be of two types, namely (1) Complete or Full Repossession and (2) Partial Repossession.

If a hire purchaser fails to pay any installment on the stipulated date, the hire purchaser is said to be at default. In case of default by the hire purchaser, the hire vendor may repossess the goods. Repossession means taking back the possession of goods by the hire vendor. Subject to agreement, the repossession may be either complete or partial.

Meaning of Complete or Full Repossession

In case of complete or full repossession the hire vendor takes back the possession of all the goods.

Journal Entries under Complete or Full Repossession

All Entries till the date of default are passed in the usual manner. The additional Entries are as follows:

Hire Purchaser	Installment Sale
1. For Closing Hire Vendor’s Account	1. On Repossession of goods
Hire Vendor’s A/c	Goods Repossessed A/c
To, Asset A/c	To, Hire Purchaser’s A/c
Note: This entry is passed with the amount due to the hire-vendor.	Note: This entry is passed with the revalued amount of goods repossessed.
2. For Closing Asset Account	2. For amount spent on reconditioning of Goods Repossessed
(i) If the Book Value of the Asset exceeds the amount due to Hire-Vendor	Goods Repossessed A/c
Profit & Loss A/c	To, Cash A/c/Bank A/c
To, Asset A/c	3. For sale of Goods Repossessed
(ii) If the amount due to Hire-Vendor exceeds the Book Value of the Asset	Cash A/c/Bank A/c /Debtors A/c
Asset A/c	To, Goods Repossessed A/c
To, Profit & Loss A/c	4. For loss on sale of Goods Repossessed
	Profit & Loss A/c
	To, Goods Repossessed A/c
	Note: In case of profit, a reverse entry will be passed.

 Illustration 7

On 1.1.2020, A purchased 5 Machines from B. Payment was to be made — 20% down and the balance in four annual instalments of ₹ 2,80,000, ₹ 2,60,000, ₹ 2,40,000 and ₹ 2,20,000 commencing from 31.12.2020. The vendor charged interest @ 10% p.a. A, writes off depreciation @ 20% p.a. on the original cost.

On A’s failure to pay the instalment due on 31.12.2021, B repossessed all the machines on 01.01.2022 and valued them on the basis of 40% p.a. depreciation on W.D.V. basis. B after incurring ₹ 6,000 on repairs sold the machines for ₹2,66,000 on 30th June 2022. Prepare the relevant accounts in the books of A and B.

Solution:

Computation of Cash Price and Periodic Interest

A	B	C	D = B + C	E = D×R/ (100 + R)	F = D-E
Instalment Number	Closing Balance after the Payment of Instalment	Instalment Amount	Closing Balance before the payment of Instalment	Interest	Opening Balance
IV	-	2,20,000	2,20,000	20,000	2,00,000
III	2,00,000	2,40,000	4,40,000	40,000	4,00,000
II	4,00,000	2,60,000	6,60,00	60,000	6,00,000
I	6,00,000	2,80,000	8,80,000	80,000	8,00,000

Let the cash price be ‘X

X = ₹ 8,00,000 + 20% of X (i.e. down payment) 0.8X = ₹ 8,00,000

X = ₹ 8,00,000/0.8 = ₹10,00,000

Ledger Accounts in the book of A

 Machinery Account

Dr.					Cr.
Date	Particulars	₹	Date	Particulars	₹
01.01.20	To B’s A/c	10,00,000	31.12.20	By Depreciation A/c	2,00,000
				By Balance c/d	8,00,000
		10,00,000			10,00,000
01.01.21	To Balance b/d	8,00,000	31.12.21	By Depreciation A/c	2,00,000
				By Balance c/d	6,00,000
		8,00,000			8,00,000
01.01.22	To Balance b/d	6,00,000	01.01.22	By B’s A/c	6,60,000
	To P&L A/c (Profit)	60,000
		6,60,000			6,60,000

B’s Account

Dr.					Cr.
Date	Particulars	₹	Date	Particulars	₹
01.01.20	To Bank A/c (Down payment)	2,00,000	01.01.20	By Machinery A/c	1,00,000
31.12.20	To Bank A/c [₹2,00,000 + ₹80,000]	2,80,000	31.12.20	By Interest A/c [(₹10,00,000 - ₹2,00,000) ×10/100]	80,000
	To Balance c/d	6,00,000
		10,80,000			10,80,000
31.12.21	To Balance c/d	6,60,000	01.01.21	By Balance b/d	6,00,000
				By Interest A/c (₹6,00,000 × 10/100)]	60,000
01.01.22	To Machinery A/c	6,60,000	01.01.22	By Balance b/d	6,60,000

Ledger Accounts in the books of B

A’s Account

Dr.					Cr.
Date	Particulars	₹	Date	Particulars	₹
01.01.20	To H.P. Sales A/c	10,00,000	01.01.20	By Bank A/c (Down Payment)	2,00,000
31.12.20	To Interest A/c [(₹10,00,000 - ₹2,00,000) × 10/100]	80,000	31.12.20	By Bank A/c (₹2,00,000 + ₹80,000)	2,80,000
				By Balance c/d	6,00,000
		10,80,000			10,80,000
01.01.21	To Balance b/d	6,00,000	31.12.21	By Balance c/d	6,60,000
31.12.21	To Interest A/c[ ₹6,00,000 × 10/100]	60,000
		6,60,000			6,60,000
01.01.22	To Balance b/d	6,60,000	01.01.22	By H.P. Goods Repossessed A/c	3,60,000
				By Profit & Loss A/c	3,00,000
		6,60,000			6,60,000

H.P. Goods Repossessed Account

Dr.					Cr.
Date	Particulars	₹	Date	Particulars	₹
01.01.22	To A’s A/c	3,60,000	30.06.22	By Bank A/c	3,66,000
	To Bank A/c	6,000		By P&L A/c	1,00,00
		3,66,000			3,66,000

Partial Repossession

In case of partial repossession, the hire vendor takes back the possession of a part of the goods.

Practical Steps under Partial Repossession

Step 1: Calculate Book value of Goods Repossessed
A. Cost
B. Less: Depreciation upto date of repossession
C. Book value of Goods Repossessed

Step 2: Calculate Agreed Value of Goods Repossessed

Step 3: Loss on default = Book Value – Agreed Value

Journal Entries Under Partial Repossession

Entries till the date of default are passed in the usual manner. The additional Entries are as follows

Hire Purchaser	Installment Sale
1. For transfer of the agreed value of Goods Repossessed	1.   On Repossession of Goods at agreed value
Hire Vendor’s A/c	H.P. Goods Repossessed A/c
To, Asset A/c	To, Hire Purchaser’s A/c
2. For Transfer of Loss on default	2,3,4—Same entries as in case of complete repossession.
Profit & Loss A/c
To, Asset A/c

 Illustration 8

On 1.1.2020, A purchased 5 Machines from B. Payment was to be made—20% down and the balance in four annual instalments of ₹ 2,80,000, ₹ 2,60,000, ₹ 2,40,000 and ₹ 2,20,000 commencing from 31.12.2011. The vendor charged interest @ 10% p.a. A, writes off depreciation @ 20% p.a. on the original cost.

On A’s failure to pay the instalment due on 31.12.2021, after negotiations on 01.01.2022 B agreed to leave two machines with A adjusting the value of the other three machines against the amount due.The machines being valued at cost less 40% p.a. depreciation on W.D.V basis, B after spending ₹6000 on repairs of each of such machines sold @ ₹70,000 on 30th June 2022. Prepare the relevant accounts in the books of A and B.

Solution: 

A	B	C	D= B+C	E = D×R/(100 +R)	F = D-E
Instalment Number	Closing Balance after the payment of Instalment	Instalment Amount	Closing Balance before the payment of Instalment	Interest	Opening Balance
IV	-	2,20,000	2,20,000	20,000	2,00,000
III	2,00,0000	2,40,000	4,40,000	40,000	4,00,000
II	4,00,000	2,60,000	6,60,000	60,000	6,00,000
I	6,00,000	2,80,000	8,80,000	80,000	8,00,000

Let the cash price be ’X’

X= ₹8,00,000 +20% of X (i.e. down payment)

0.8X = ₹8,00,000

X = ₹8,00,000/0.8 = ₹10,00,000

Machinery Account

Date	Particulars	₹	Date	Particulars	₹
01.01.20	To B A/c	10,00,000	31.12.20	By Depreciation A/c	2,00,000
				By Balance c/d	8,00,000
		10,00,000			10,00,000
01.01.21	To Balance b/d	8,00,000	31.12.21	By Depreciation A/c	2,00,000
				By Balance c/d	6,00,000
		8,00,000			8,00,000
01.01.22	To Balance b/d	6,00,000	01.01.22	By B A/c	2,16,000
				By P&L A/c [loss on default]	1,44,000
				By Depreciation A/c	80,000
				By Balance c/d	1,60,000
		6,00,000			6,00,000

B’s Account

Date	Particulars	₹	Date	Particulars	₹
01.01.20	To Bank A/c (Down payment)	2,00,000	01.01.20	By Machinery A/c	10,00,000
31.12.20	To Bank A/c [₹2,00,000 + ₹80,000]	2,80,000	31.12.20	By Interest A/c [(₹10,00,000 - ₹2,00,000) × 10/100]	80,000
	To Balance c/d	6,00,000
		10,80,000			10,80,000
31.12.21	To Balance c/d	6,60,000	01.01.21	By Balance b/d	6,00,000
			31.12.21	By Interest A/c [(₹6,00,000 × 10/100)]	60,000
01.01.22	To Machinery A/c	6,60,000	01.01.22	By Balance b/d	6,60,000

Working Notes

1. Calculation of Book value of Goods Repossessed

A. Cost [₹2,00,000 × 3]	₹ 6,00,000
B. Less: Depreciation for 2 years [₹6,00,000 × 20% × 2]	₹ 2,40,000
	₹ 3,60,000

2. Calculation of Agreed value of Goods Repossessed

A. Cost [₹2,00,000 × 3]	₹ 6,00,000
B. Less: Depreciation for 1st Year [40% of ₹6,00,000]	₹ 2,40,000
C. Book Value in the beginning of 2nd year	₹ 3,60,000
D. Less: Depreciation for 2nd year [40% of ₹3,60,000]	₹ 1,44,000
E. Book Value at the end of 2nd Year	₹ 2,16,000

2. Loss on Default = Book Value – Agreed Value = ₹3,60,000 - ₹2,16,000 = ₹1,44,000

A’s Account

Dr.					Cr.
Date	Particulars	₹	Date	Particulars	₹
01.01.20	To H.P. Sales A/c	10,00,000	01.01.20	By Bank A/c (Down payment)	2,00,000
31.12.20	To Interest A/c [(₹10,00,000 - ₹2,00,000)×10/100]	80,000	31.12.20	By Bank A/c [₹2,00,000 +₹80,000]	2,80,000
				By Balance c/d	6,00,000
		10,80,000			10,80,000
01.01.21	To Balance b/d	6,00,000	31.12.21	By Balance c/d	6,60,000
31.12.21	To Interest A/c [₹6,00,000 × 10/100]	60,000
		6,60,000			6,60,000
01.01.22	To Balance b/d	6,60,000	01.01.22	By H.P. Goods Repossessed A/c	2,16,000
				By Balance c/d	4,44,000
		6,60,000			6,60,000

H.P. Goods Repossessed Account

Dr.					Cr.
Date	Particulars	₹	Date	Particulars	₹
01.01.22	To A’s A/c	2,16,000	30.06.22	By Bank A/c	2,10,000
	To Bank A/c (Repairs) [₹6,000 ×3]	18,000		By P&L A/c (Loss)	24,000
		2,34,000			2,34,000

Illustration 9

A Transport purchased from Kolkata Motors 3 Tempos costing ₹ 50,000 each on the hire-purchase system on 1.1.2020. Payment was to be made ₹ 30,000 down and the remainder in 3 equal annual instalments payable on 31.12.2020, 31.12.2021 and 31.12.2022 together with interest @ 9%. p.a. A Transport writes off depreciation at the rate of 20% p.a. on the diminishing balance. It paid the instalment due at the end of the first year i.e. 31.12.2020 but could not pay the next on 31.12.2021. Kolkata Motors agreed to leave one Tempo with the purchaser on 31.12.2021 adjusting the value of the other 2 Tempos against the amount due on 31.12.2021. The Tempos were valued on the basis of 30% depreciation annually on W.D.V. basis.

Required: Show the necessary accounts in the books of A Transport for the year 2020, 2021,2022.

Solution:

Tempos Account

Dr.
Date	Particulars	₹	Date	Particulars	Date
01.01.20	To Kolkata Motors’ A/c (₹ 50,000 × 3)	1,50,000	31.12.20	By Depreciation A/c (20% on ₹1,50,000)	30,000
				By Balance c/d	1,20,000
		1,50,000			1,50,000
01.01.21	To Balance b/d	1,20,000	31.12.21	By Depreciation A/c	24,000
			31.12.21	By Kolkata Motors’ A/c (Value of 2 tempos taken away)	49,000
			31.12.21	By P&L A/c (Loss on Default)	15,000
			31.12.21	By Balance c/d (value of one tempo left)	32,000
		1,20,000			1,20,000
01.01.22	To Balance b/d	32,000	31.12.22	By Depreciation A/c	6,400
			31.12.22	By Balance c/d	25,600
		32,000			32,000

Kolkata Motor’s Account

Dr.
Date	Particulars	₹	Date	Particulars	Date
01.01.20	To Bank A/c (Down Payment)	30,000	01.01.20	By Tempos A/c (₹50,000 ×3)	1,50,000
31.12.20	To Bank A/c	50,800	31.12.20	By Interest A/c (9% on ₹1,20,000)	10,800
31.12.20	To Balance c/d	80,000
		1,60,800			1,60,000
31.12.21	To Tempos A/c	49,000	01.01.21	By Balance b/d	80,000
31.12.21	To Balance c/d	38,200	31.12.21	By Interest A/c (9% on ₹ 80,000)	7,200
		87,200			87,200
31.12.22	To Bank A/c	41,638	01.01.22	By Balance b/d	38,200
			31.12.22	By Interest A/c  (9% on ₹38,200)	3,438
		41,638			41,638

Working Notes :

1. Value of a tempo left with the buyer = ₹50,000 × 80/100 × 80/100 = ₹ 32,000

2. Value of Tempos taken away by the seller = ₹50,000 × 2 × 70/100 × 70/100 = ₹ 49,000

3. Loss on Tempos taken away = Book Value – Agreed Value = [2 × ₹50,000 × 80/100 × 80/100] - ₹ 49,000 = ₹ 15,000.

Illustration 10

On 1 January 2021, A purchased from B a plant valued at ₹ 7,45,000; payment to be made by four semi-annual installments of ₹ 2,10,000 each; interest being charged at 5% per half year. A paid the first installment on 1st July 2021 but failed to pay the next. B repossessed the plant on 4 January 2022. On 5 January 2022, after negotiation, A was allowed to retain the plant of which the original cash price was ₹ 3,90,000 and he was to bear the loss on the remainder which was taken over by B on that date for ₹ 3,75,000. B waived the interest after 31st December 2021. Another agreement was signed for payment of the balance amount.

Show by ledger accounts the necessary records in the books of A charging depreciation at 10% per annum half-yearly on the written down value.

Solution:

Machinery Account

Dr.	Particulars	₹	Dr.	Particulars	₹
01.01.2021	To B’s A/c	7,45,000	30.06.2021	By Depreciation A/c	37,250
				By Balance c/d	7,07,750
		7,45,000			7,45,000
01.07.2021	To Balance b/d	7,07,750	31.12.2021	By Depreciation A/c	35,388
				By Balance c/d	6,72,362
		7,07,750			7,07,750
01.01.2022	To Balance b/d	6,72,362	05.01.2022	By B’s A/c	3,75,000
	To Profit & Loss A/c (Balancing Figure) [3,75,000-3,20,387]	54,613		By Balance c/d	3,51,975
		7,26,975			7,26,975

B’s Account

Dr.	Particulars	₹	Dr.	Particulars	₹
30.6.2021	To balance c/d	7,82,250	01.01.2021	By Plant on Hire Purchase A/c	7,45,000
			30.06.2021	By Interest A/c [₹7,45,000 × 5%]	37,250
		7,82,250			7,82,250
01.07.2021	To Bank A/c	2,10,000	01.07.2021	By Balance b/d	7,82,250
31.12.2021	To Balance c/d	6,00,863	31.12.2021	By Interest A/c [₹5,72,250 × 5%]	28,613
		8,10,863			8,10,863
05.01.2022	To Machinery A/c	3,75,000	01.01.2022	By Balance b/d	6,00,863
	To Balance c/d	2,25,863
		6,00,863			6,00,863

Working Note :

Calculation of Book Value of Plant Repossessed and Retained

	Repossessed (₹)	Retained (₹)
A. Cash Price of the Plant	3,55,000	3,90,000
B. Less: Depreciation @10% for 6 months	(17,750)	(19,500)
C. Book Value	3,37,250	3,70,500
D. Less: Depreciation @10% for 6 months	(16,863)	(18,525)
E. Book Value	3,20,387	3,51,975

Illustration 11

Z sold 3 Machinery for a total cash sale price of ₹ 6,00,000 on hire-purchase basis to X on 01.01.2019. The terms of agreement provided for 30% of cash down and the balance of the cash price in three equal instalments, together with interest at 10% per annum compounded annually. The instalments were payable as per the following schedule:

1st instalment on 31.12.2020; 2nd instalment on 31.12.2021 and 3rd instalment on 31.12.2022. X paid the 1st instalment on time, but failed to pay thereafter. On his failure to pay the second instalment, Z repossessed two machineries and valued them at 50% of the cash price. X charges 10% p.a. depreciation on straight line method.

Prepare necessary ledger accounts in the books of X for 2019-2021.

Solution:

Machinery Account

Dr.					Cr.
Date	Particulars	(₹000)	Date	Particulars	(₹000)
01.01.2019	To Z’s A/c	600	31.12.2019	By Depreciation A/c	60
				By Balance c/d	540
		600			600
01.01.2020	To Balance b/d	540	31.12.2020	By Depreciation A/c	60
		540		By Balance c/d	480
		540			540
01.01.2021	To Balance b/d	480	31.12.2021	By Depreciation A/c	60
				By Z’s A/c	200
				By Profit and Loss A/c (balancing figure)	80
				By Balance c/d	140
		480			480

Z’s Account

Dr.					Cr.
Date	Particulars	(₹000)	Date	Particulars	(₹000)
01.01.2019	To Bank A/c	180	31.12.2019	By Machinery A/c	600
31.12.2019	To Balance c/d	462		By Interest A/c [10% on (₹6,00,000 - ₹1,80,000)]	42
		642			642
31.12.2020	To Bank A/c (1,40,000 + 42,000 + 46,200)	228.2	01.01.2020	By Balance c/d	462
	To Balance c/d	280	31.12.2020	By Interest A/c [10% on ₹4,62,000]	462
		508.2			508.2
31.12.2021	To Machinery A/c	200	01.01.2021	By Balance b/d	280
	To Balance c/d	108	31.12.2021	By Interest A/c	28
		308			308

Working Notes :

1. Book value of machine left and repossessed

	1 left	2 repossessed
A. Costs	2,00,000	4,00,000
B. Less: Depreciation for 3 years @10%	(60,000)	(1,20,000)
	1,40,000	2,80,000

2. Agreed Value of 2 Machinery Repossessed = Cash Price – 50% of cash price = ₹ (4,00,000 – 2,00,000) = ₹ 2,00,000

3. Loss on Default = Agreed Value – Book Value = ₹ (2,00,000 - 2,80,000) = ₹ 80,000

Illustration 12

X purchased a truck for ₹ 2,80,000, payment to be made ₹ 91,000 down and 3 installments of ₹ 76,000 each at the end of each year. Rate of interest is charged at 10% p.a. Buyer depreciates assets at 15% p.a. on written down value method.

Because of financial difficulties, X, after having paid down payment and first installment to the end of 1st year could not pay second installment and seller took possession of the truck. Seller, after spending ₹ 9,200 on repairs of the asset sold for ₹ 150,000. Show the relevant accounts in the books of the purchaser & the vendor.

Solution:

Particulars	Total Cash Price (₹ 000)	Instalment Paid @ 10% INT (₹ 000)	Interest Paid (₹ 000)	Paid towards Cash Price (Instalment - Interest) (₹ 000)
	280
Down Payment	91	91	0	91
	189
End of 1st year	57.1	76	18.9	57.1
	131.9
End of 2nd Year	62.81	76	13.19	62.81
	69.09
End of 3rd Year	69.09	76	6.91	69.09
Total	0.0	319	39	280

In the Books of X

Car Account

Dr.					Cr.
Date	Particulars	Amount (₹ 000)	Date	Particulars	Amount (₹ 000)
1st Year	To Vendor A/c	280		By Depreciation A/c	42
				By Bal c/d	238
		280			280
2nd Year	To Bal b/d	238		By Depreciation A/c	35.7
				By Vendors A/c	145.09
				By P/L A/c (Bal. Figure)	57.21
		238			238

Vendors Account

Dr.					Cr.
Date	Particulars	Amount (₹ 000)	Date	Particulars	Amount (₹ 000)
1st Year	To Bank (Down Payment)	91		By Car (Cash Price) A/c	280
	To Bank (Instalment)	76		By Interest A/c	18.9
	To Bal c/d	131.9
		298.9			298.9
2nd Year	To Asset A/c (Default-Assets taken over)	145.09		By Balance b/d	131.9
				Interest A/c	13.19
		145.09			145.09

In the Books of Vendor

X Account

Dr.					Cr.
Date	Particulars	Amount (₹ 000)	Date	Particulars	Amount (₹ 000)
1st Year	To Hire Purchase Sales A/c	280		By Bank (Down) A/c	91
	To Interest A/c	18.9		By Bank (Instalment) A/c	76
				By Balance c/d	131.9
		298.9			298.9
2nd Year	To Balance b/d	131.9		By Goods Repossessed A/c	145.09
	To Interest A/c	13.19
		145.09			145.09

Goods Repossessed Account

Dr.					Cr.
Date	Particulars	Amount (₹ 000)	Date	Particulars	Amount (₹ 000)
	To X A/c (Purchaser) A/c	145.09		By Bank (Sales) A/c	150
	To Bank (Repairing Charge) A/c	9.2		By P/L A/c (Bal Figure)	4.29
		154.29			154.29

 Illustration 13

Z Associates purchased seven trucks on hire purchase on 1st July, 2021. The cash purchase price of each truck was ₹ 1,00,000. The company has to pay 20% of the cash purchase price at the time of delivery and the balance in five half yearly instalment starting from 31st December, 2021 with interest at 5% per annum at half yearly rates. On the Company’s failure to pay the instalment due on 30th June 2022, it was agreed that the Company would return 3 trucks to the vender and the remaining four would be retained. The vendor agreed to allow him a credit for the amount paid against these 3 trucks less 25%. Show the relevant Accounts in the books of the purchaser and vendor assuming the books are closed in June every year and depreciation @ 20% p.a. is charged on Trucks. Vendor after spending ₹ 2,000 on repairs sold away all the three trucks for ₹ 80,000.

Solution:

In Books of Hire-Purchaser

Trucks Account

Date	Particulars	(₹000)	Date	Particulars	(₹000)
01.07.21	To Hire Vendor’s A/c (Cost of Trucks @ ₹ 1,00,000 each)	700	30.06.22	By Depreciation A/c	140
				By Hire Vendor’s A/c (Value of 3 Trucks returned to Vendor)	81
				By P & L A/c (Loss on surrender)	159
				By Balance c/d [4/7 of (₹7,00,000 - ₹1,40,000)]	320
		700			700

Hire Vendor’s Account

Date	Particulars	(₹000)	Date	Particulars	(₹000)
01.07.21	To Bank A/c (7,00,000 × 20/100)	140	01.07.21	By Trucks A/c	700
31.12.21	To Bank A/c [(20% of 5,60,000 +14,000)]	126	31.12.21	By Interest A/c [5,60,000 × 2.5%]	14
30.06.22	To Trucks A/c (Value of Trucks surrendered)	81	30.06.22	By Interest A/c [4,48,000 × 2.5%]	11.2
30.06.22	To Balance c/d	378.2
		725.2			725.2

Rate of interest is [5% ÷ 2] = 2.5% for half year.

Working Notes :

		(₹000)
(i)	Credit allowed by Vendor against 3 trucks	252
	Total amount of principal paid against 7 trucks(₹ 1,40,000 + ₹ 1,12,000)	108
	Total amount of principal paid against 3 trucks (₹ 2,52,000 × 3/7)	81
	Credit allowed by Vendor (₹ 1,08,000 – 25% of ₹ 1,08,000)	240
(ii)	Loss on surrender of 3 trucks
	Book value of 3 trucks surrendered [(₹ 1,00,000 × 3) less 20% of ₹ 3,00,000]	240
	Less : Credit allowed by Vendor against these 3 Trucks	81
	Loss on surrender of 3 Trucks	159

In Books of Hire Vendor

 Z Associates Account

Date	Particulars	(₹000)	Date	Particulars	(₹000)
01.07.21	To H.P. Sales A/c	700	01.07.21	By Bank A/c	140
31.12.21	To Interest A/c	14	31.12.21	By Bank A/c	126
30.06.12	To Interest A/c	11.2	30.06.22	By Goods Repossessed A/c	81
			30.06.22	By Balance c/d	378.2
		725.2			725.2

Goods Repossessed Account

Date	Particulars	(₹000)	Date	Particulars	(₹000)
30.6.22	To Banerjee & Co.	81	30.6.22	By Bank A/c (Sales)	80
30.6.22	To Cash A/c (expenses)	2	30.6.22	By Profit & Loss A/c (Loss on Sale)	3
		83			83

Illustration 14

On 1.1.2019, B & Brothers bought 5 computers from Chirag Computers on hire-purchase. The cash price of each computer was ₹ 20,000. It was agreed ₹ 30,000 each at the end of each year. The Vendor charges interest @ 10% p.a. The buyer depreciates computers at 20% p.a. on the diminishing balance method.

B & Brothers paid cash down of ₹ 5,000 each and two instalments but failed to pay the last instalment. Consequently, the Computer Traders repossessed three sets, leaving two sets with the buyer and adjusting the value of 3 sets against the amount due. The sets repossessed were valued on the basis of 30% depreciation p.a. on the written down value. The sets repossessed were sold by the Chirag Computers for ₹ 30,000 after necessary rapairs amounting to ₹ 5,000 on 30th June 2022.

Required : Open the necessary ledger account in the books of both the parties.

Solution:

In the Books of B & Brothers

Computers Account

Dr.					Cr.
Date	Particulars	₹	Date	Particulars	₹
01.01.19	To Chirag Computers A/c	1,00,000	31.12.19	By Depreciation A/c	20,000
				By Balance c/d	80,000
		1,00,000			1,00,000
01.01.20	To Balance b/d	80,000	31.12.20	By Depreciation A/c	16,000
				By Balance c/d	64,000
		80,000			80,000
31.12.21	To Balance b/d	64,000	31.12.21	By Depreciation A/c	12,800
				By Chirag Computers (computers surrendered)	20,580
				By P & L A/c - Loss on surrender	10,140
				By Balance c/d	20,480
		64,000			64,000

Chirag Computers Account

Dr.					Cr.
Date	Particulars	₹	Date	Particulars	₹
01.01.19	To Cash A/c	25,000	01.01.19	By Computers A/c	1,00,000
31.12.19	To Cash A/c	30,000	31.12.19	By Interest A/c [(₹ 1,00,000 – ₹ 25,000) × 10%]	7,500
	To Balance c/d	52,500
		1,07,500			1,07,500
31.12.20	To Cash	30,000	01.01.20	By Balance b/d	52,500
	To Balance c/d	27,750	31.12.20	By Interest A/c [52,500 × 10%]	5,250
		57,750			57,750
31.12.21	To Computers A/c (surrendered)	20,580	01.01.21	By Balance b/d	27,750
	To Balance c/d	9,420	31.12.21	By Interest A/c	2,250
		30,000			30,000

Working Notes :

(i) Total Interest = Hire Purchase Price – Cash Price

= [₹ 25,000 + (₹ 30,000 × 3)] – (₹ 20,000 × 5)

= ₹ 1,15,000 – ₹ 1,00,000 = ₹ 15,000

(ii) Interest for 3rd year = ₹ 15,000 – ₹ 7,500 – ₹ 5,250 = ₹ 2,250

(iii) Agreed Value of 3 Computers Repossessed on the basis of depreciation @ 30% p.a.

	₹
Cost (Cash Price) of 3 Computers	60,000
Less : Depreciation @ 30% p.a. for 3 years [₹ 18,000 + ₹ 12,600 + ₹ 8,820]	39,420
	20,580
(iv) Book Value of 3 Computers Repossesed on the basis of depreciation @ 20% p.a	60,000
Cost (Cash Price) of 3 Computers	29,280
	30,720
(v) Loss on Surrender = Book value – Agreed Value = ₹ 30,720 – ₹ 20,580 =	₹ 10,140

In the Books of Chirag Computers

 B & Brothers Account

Dr.					Cr.
Date	Particulars	₹	Date	Particulars	₹
01.01.19	To H.P. Sales A/c	1,00,000	01.01.19	By Cash A/c	25,000
31.12.19	To Interest A/c	7,500	31.12.19	By Cash A/c	30,000
				By Balance c/d	52,500
		1,07,500			1,07,500
01.01.20	To Balance b/d	52,500	31.12.20	By Cash A/c	30,000
31.12.20	To Interest A/c	5,250	31.12.20	By Balance c/d	27,750
		57,750			57,750
01.01.21	To Balance b/d	27,750	31.12.21	By Goods Repossessed A/c	20,580
31.12.21	To Interest A/c	2,250		By Balance c/d	9,420
		30,000			30,000

Goods Repossessed Account

Dr.					Cr.
Date	Particulars	₹	Date	Particulars	₹
30.06.22	To B & Brothers A/c	20,580	30,06,22	By Cash A/c (sales)	30,000
30.06.22	To Cash A/c (Repairs)	5,000
30.06.22	To Profit & Loss A/c (Profit)	4,420
		30,000			30,000

Debtors Method, Stock-Debtors Method & Final Accounts Method

When the per unit sale price of the goods sold under hire purchase is small, but the number of items sold is large, it becomes infeasible for the Hire vendor to maintain a separate account for individual hire purchaser. So Hire Vendor maintains a Day book for recording the hire purchase transactions. This is called the Hire Purchase Sales Register. The Hire Vendor can ascertain the profit using the information contained in the Hire Purchase Sales Register by adopting any of the following methods:

[A] Debtors Method

[B] Stock-Debtors Method

[C] Final Accounts Method

In such transactions no separate accounting is done for the interest element. In other words, no distinction is done between trading profit and interest charged.

[A] DEBTORS METHOD or HIRE PURCHASE TRADING (Stock Approach)

Under this method both double entry ledger accounts and memoranda accounts are maintained for recording hire purchase transactions. The double entry accounts maintained are H.P. Trading A/c, General Trading A/c (if any), Goods sold on H.P. A/c, and the Memorandum accounts are Memorandum H.P. Stock A/c, Memorandum H.P. Debtors A/c, Memorandum Shop/ Godown Stock A/c (if any). The profit/ loss from hire purchase transaction gets determined through H.P. Trading A/c.

Under this method, the hire purchase transactions are accounted for as under:

Transaction/Items	Journal entry
Opening Balance of ‘Shop Stock’ or ‘Godown Stock’	General Trading A/c
	To, Shop/Godown Stock A/c
Opening balance of ‘Stock out on hire’ or ‘Stock with H.P. Customers’ or ‘H.P. Stock’	H.P Trading A/c
	To, H.P Stock A/c(at H.P. price)
Load on ‘Stock out on hire’ or ‘Stock with H.P. Customers’ or ‘H.P. Stock’ (Opening)	Stock Reserve A/c
	To, H.P. Trading A/c
Opening balance of ‘Overdue Installments’ or ‘Installments Due ( customers still paying )’ or ‘H.P. Debtors’	H.P Trading A/c
	To, H.P. Debtors A/c
Good sold on H.P. basis ( at H.P. price)	H.P Trading A/c
	To, Goods sent on H.P. A/c (at H.P. price)
Load on ‘Goods sold on H.P	Goods sent on H.P. A/c
	To, H.P. Trading A/c
Transfer of Purchases A/c	General Trading A/c
	To, Purchases A/c (at cost)
Installments matured	No journal entry
Cash received from H.P. customers	Bank  A/c
	To, H.P. Trading A/c
Expenses relating H.P. Transactions (Hire Expenses)	H.P Trading A/c
	To, Hire Expenses A/c
Repossession of goods : ● Unmatured Installments on repossessed goods	Repossessed Stock A/c
	To, H.P. Trading A/c
● Matured Installments / Installments due on repossessed goods	Repossessed Stock A/c
	To, H.P. Trading A/c
● Resale of repossessed goods	Bank A/c
	To, Repossessed Stock A/c
● Value of repossessed stock	No journal entry
	N.B.: It is used to ascertain the ‘Loss on Repossession’
● Loss on repossession	H.P Trading A/c
	To, Loss on Repossession A/c
Closing of ‘Goods sent out on H.P. A/c’	Goods sold on H.P. A/c
	To, Shop/Godown Stock A/c
Closing balance of ‘Shop Stock’ or Godown  Stock’	Shop/Godown Stock A/c
	To, General Trading A/c
Closing balance of ‘Stock out on hire’ or ‘Stock with H.P. Customers’ or ‘H.P. Stock	H.P. Stock A/c
	To, H.P. Trading A/c(at H.P. price)
Load on ‘Stock out on hire’ or Stock with H.P. Customers or ‘H.P. Stock (Closing)	H.P Trading A/c
	To, Stock Reserve A/c
Closing balance of ‘Overdue Installments’ or ‘Installments Due (customers still paying)’ or ‘H.P. Debtors'	H.P. Debtors A/c
	To, H.P. Trading A/c
Transfer of Profit earned from hire purchase	H.P Trading A/c
	To, General Profit & Loss A/c
Transfer of Loss suffered from hire Purchase	General Profit & Loss A/c
	To, H.P. Trading A/c

Transaction/Items	Journal entry
Opening Balance of ‘Shop Stock’ or ‘Godown Stock’	Opening balance in the left side of Memorandum Shop Stock A/c or Memorandum Godown Stock A/c as ‘To Balance b/f’.
Opening balance of ‘Stock out on hire’ or ‘Stock with H.P. Customers’ or ‘H.P. Stock’	Opening balance in the left side of Memorandum H.P. Stock A/c as ‘To Balance b/f’.
Load on ‘Stock out on hire’ or ‘Stock with H.P. Customers’ or ‘H.P. Stock’ (Opening)	No recording
Opening balance of ‘Overdue Installments’ or ‘Installments Due ( customers still paying )’ or ‘H.P. Debtors’	Opening balance in the left side of Memorandum H.P. Debtors  A/c as ‘To Balance b/f’.
Good sold on H.P. basis ( at H.P. price)	Left side of Memorandum H.P. Stock A/c as ‘To goods sold on H.P’..
Load on ‘Goods sold on H.P	No recording
Transfer of Purchases A/c	Left side of Memorandum Shop Stock A/c as ‘To Purchases’.
Installments matured	Right  side of Memorandum H.P. Stock A/c as ‘By Matured Installments’ Left side of Memorandum H.P. Debtors A/c as ‘To Matured Installments’.
Cash received from H.P. customers	Right side  of Memorandum H.P. Debtors A/c as ‘By Cash Received’.
Expenses relating H.P. Transactions (Hire Expenses)	No recording
Repossession of goods : ● Unmatured Installments on repossessed goods	Reflected in the right side of Memorandum H.P. Stock A/c as ‘By Goods Repossessed’.
● Matured Installments / Installments due on repossessed goods	Right side of Memorandum H.P Debtors A/c as ‘By Goods Repossessed’.
● Resale of repossessed goods	No recording
● Value of repossessed stock	No recording
● Loss on repossession	No recording
Closing of ‘Goods sent out on H.P. A/c’	Right side of Memorandum Shop Stock A/c as ‘By Goods sold on H.P.(at cost)’
Closing balance of ‘Shop Stock’ or Godown  Stock’	Closing balance in the right side of Memorandum Shop Stock A/c or Memorandum Godown Stock A/c as ‘By Balance c/f’.
Closing balance of ‘Stock out on hire’ or ‘Stock with H.P. Customers’ or ‘H.P. Stock	Closing balance in the right side of Memorandum H.P. Stock A/c as ‘By Balance c/f’.
Load on ‘Stock out on hire’ or Stock with H.P. Customers or ‘H.P. Stock (Closing)	No recording
Closing balance of ‘Overdue Installments’ or ‘Installments Due (customers still paying)’ or ‘H.P. Debtors'	Closing balance in the right side of Memorandum H.P. Debtors A/c as ‘By Balance c/f’.
Transfer of Profit earned from hire purchase	No recording
Transfer of Loss suffered from hire Purchase	No recording

Proforma of H. P. Trading Account

Books of Hire Vendor Hire Purchase Trading A/c for the year ended …. 

Particulars	(₹)	Particulars	(₹)
To, H.P. Stock [at H.P. price: Opening Balance]	xx	By, Stock Reserve [Load on Opening Stock]	xx
To, H.P. Debtors[Opening Balance]	xx	By, Goods sent on H.P. [ Load on goods sent]	xx
To, Goods sold on H.P. A/c [at H.P.]	xx	By, Bank A/c [Cash Received]	xx
To, Hire Expenses	xx	By, Repossessed Stock A/c	xx
To, Loss on Repossession	xx	By, H.P. Stock A/c [at H.P. Price: Closing Balance]	xx
To, Stock Reserve [Load on Closing Stock]	xx	By, H.P. Debtors [Closing Balance]	xx
To, General P/L A/c [ Profit on H.P	xx	By, General P/L A/c [Loss on H.P transferred (Bal. Fig.)]	xx
	xxx		xxx

[B] STOCK - DEBTORS METHOD

Under this method, the basic principle is to do complete accounting of all hire purchase transactions under double entry system. The ledger accounts that are maintained in this case are: H.P. Stock A/c, H.P. Stock Adjustment A/c, H.P. Debtors A/c, Shop/ Godown Stock A/c (if any) and Goods sold on H.P A/c. In case of repossession of goods by hire vendor, Repossessed Stock A/c is maintained. The profit/loss is determined through H.P. Stock Adjustment A/c.

Under this method, the hire purchase transactions are accounted for as under:

Transaction/Items	Journal entry/ Treatment
Opening Balance of ‘Shop Stock’ or ‘Godown Stock’	Opening balance in Debit side of Shop Stock A/c or Godown Stock A/c or General Trading A/c as ‘To, Balance b/f’.
Opening balance of ‘Stock out on hire’ or ‘Stock with H.P. Customers’ or ‘H.P. Stock’	Opening balance in Debit side of H.P Stock A/c as ‘To, Balance b/f’.
Opening balance of ‘Overdue Installments’ or ‘Installments Due ( customers still paying )’ or ‘H.P. Debtors’	Opening balance in Debit  side of H.P. Debtors A/c as ‘To, Balance b/f’.
Good sold on H.P. basis ( at H.P. price)	H.P Stock A/c
	To, Goods sent on H.P. A/c
Transfer of Purchases A/c	Shop stock/Godown Stock /General Trading A/c
	To, Purchases A/c
Installments matured	H.P. Debtors A/c
	To, H.P. Stock A/c
Cash received from H.P. customers	Bank  A/c
	To, H.P. Debtors A/c
Expenses relating H.P. Transactions (Hire Expenses)	H.P. Stock Adjustment A/c
	To, Bank A/c
Repossession of goods : ● Unmatured Installments on repossessed goods	Repossessed Stock A/c
	To, H.P. Stock A/c
● Matured Installments / Installments due on repossessed goods	Repossessed Stock A/c
	To, H.P. DebtorsA/c
● Resale of repossessed goods	Bank A/c
	To, Repossessed Stock A/c
● Value of repossessed stock	Closing balance in Credit side of  Repossessed  Stock A/c
● Loss on repossession	H.P. Stock Adjustment A/c
	To, Repossessed Stock A/c
Closing of ‘Goods sent out on H.P. A/c’	Goods sold on H.P. A/c
	To, Shop Stock A/c
Closing balance of ‘Shop Stock’ or Godown  Stock’	Closing balance in Credit side of Shop  Stock A/c or Godown Stock A/c or General Trading A/c as ‘By Balance c/f.’
Closing balance of ‘Stock out on hire’ or ‘Stock with H.P. Customers’ or ‘H.P. Stock	Closing balance in Credit side of H.P. Stock A/c as ‘By Balance c/f’.
Closing balance of ‘Overdue Installments’ or ‘Installments Due (customers still paying)’ or ‘H.P. Debtors'	Closing balance in Credit side of H.P. Debtors A/c as ‘By Balance c/f’.
Transfer of Profit earned from hire purchase	H.P Stock Adjustment A/c
	To, General Profit & Loss A/c
Transfer of Loss suffered from hire Purchase	General Profit & Loss A/c
	To, H.P. Stock Adjustment A/c

[C] FINAL ACCOUNTS METHOD or HIRE PURCHASE TRADING (Transaction Approach)

This method is based on the basic principle of complete double entry accounting of all hire purchase transactions. Double entry ledger accounts that are maintained are – H.P. Trading A/c,  H.P. Debtors A/c, H.P. Sales A/c.

H.P. Sales Account: It records value of goods sold on hire purchase basis and installments matured during the period. Thus, the closing balance reflects the amount of ‘Unmatured installments’.

H.P. Debtors Account: It records value of goods sold on hire purchase basis and the collection from the customers. Closing balance reflects both ‘Matured Installments but not yet received (customers paying)’ and ‘ Unmatured Installments’.

Under this method, the operating  result  (i.e Profit/Loss) gets determined through H.P. Trading Account.

Hire Purchase transactions under this method are accounted as follows:

Transaction/Items	Journal entry/ Treatment
Opening Balance of ‘Shop Stock’ or ‘Godown Stock’	Opening balance in Debit side of H.P. Trading A/c as ‘To Balance b/f’’.
Opening balance of ‘Stock out on hire’ or ‘Stock with H.P. Customers’ or ‘H.P. Stock’	Opening balance in Debit side of H.P. Trading A/c as ‘To Balance b/f’ at ‘Cost Equivalent’. Opening balance in Debit side of H.P. Debtors A/c as ‘To Balance b/f’; and Opening balance in Credit side H.P sales A/c as ‘By Balance b/f’.
Opening balance of ‘Overdue Installments’ or ‘Installments Due ( customers still paying )’ or ‘H.P. Debtors’	Opening balance in Debit side of H.P. Debtors A/c as ‘To Balance b/f’
Good sent old on H.P. basis ( at H.P. price)	H.P DebtorsA/c
	To, H.P. Sales. A/c
Transfer of Purchases A/c	H.P. Trading A/c
	To, Purchases A/c
Installments matured  (i.e. Recognition of matured installments)	H.P. SalesA/c
	To, H.P. TradingA/c
Cash received from H.P. customers	Bank  A/c
	To, H.P. Debtors A/c
Expenses relating H.P. Transactions (Hire Expenses)	H.P. Trading A/c
	To, Expenses A/c
Repossession of goods : ● Unmatured Installments on repossessed goods	H.P. Trading A/c
	To, H.P. Debtors A/c
● Matured Installments / Installments due on repossessed goods	H.P. Sales A/c
	To, H.P. DebtorsA/c
● Resale of repossessed goods	Bank A/c
	To, H.P. Trading A/c
● Value of repossessed stock	Closing balance in Credit side of H.P. Trading A/c as ‘By Balance c/f’.
● Loss on repossession	No Journal Entry
Closing balance of ‘Shop Stock’ or Godown  Stock’	Closing balance in Credit side of H.P. Trading A/c as ‘By Balance c/f’.
Closing balance of ‘Stock out on hire’ or ‘Stock with H.P. Customers’ or ‘H.P. Stock	Closing balance in Credit side of H.P. Trading A/c as ‘By Balance c/f’.
Closing balance of ‘Overdue Installments’ or ‘Installments Due (customers still paying)’ or ‘H.P. Debtors'	Closing balance in Credit side of H.P. Debtors A/c as ‘ By Balance c/f’..
Transfer of Profit earned from hire purchase	H.P Trading A/c
	To, General Profit & Loss A/c
Transfer of Loss suffered from hire Purchase	General Profit & Loss A/c
	To, H.P. Trading A/c

Format of H.P Trading A/c:

Books of Hire Vendor Hire Purchase Trading A/c for the year ended ….. 

Particulars	(₹)	Particulars	(₹)
To, Balance b/f:		By, H.P Sales [Matured Intsalments]	xx
Stock at shop	xx	By, Balance c/f:
Stock with customer [C.P]	xx	Stock at Shop	xx
To, Purchases	xx	Stock with Customer [C.P.]	xx
To, Hire Expenses	xx	Repossessed Goods	xx
To, General P/L A/c [ Profit on H. P transferred (Bal. Fig.)]	xx	By, General P/L A/c [Loss on H. P transferred (Bal. Fig.)]	xx
	xxx		xxx

Illustration 15

Beta Ltd. sells its products only on hire purchase terms, the hire purchase price being ‘cost plus 33.33%’. From the given information, you are required determine the operating results from the hire purchase transactions by drafting necessary accounts under each of the following methods:

[A] Debtors Method

[B] Stock-Debtors Method

[C] Final Accounts Method

	1.4.2021 (₹)	1.4.2022 (₹)
Stock out on hire at H.P price	2,40,000	?
Stock in hand at shop	30,000	42,000
Installments due from customers	18,000	30,000

Further information:

• Goods repossessed (installments not yet matured ₹ 12,000) valued at ₹ 4,800;
• Purchases made during the year 2021-22 amounted to ₹ 4,08,000;
• Cash collected from customers during 2021-22 was ₹ 4,80,000.

From the given information, you are required independently determine the operating results from the hire purchase transactions by drafting necessary accounts under each of the following methods:

[A] Debtors Method;

[B] Stock-Debtors Method; and

[C] Final Accounts Method.

Method A: Debtors Method

Solution:

Method A: Debtors Method

Books of Beta Ltd. Hire Purchasing Trading Account for the year ended 31.3.2022

Dr.			Cr.
Particulars	(₹)	Particulars	(₹)
To, H.P. Stock [at H.P. price: 1.4.2021]	2,40,000	By, Stock Reserve [2,40,000 × 1/4]	60,000
To, H.P. Debtors [1.4.2021]	18,000	By, Goods sent on H.P. [ Load: 5,28,000 × ¼]	1,32,000
To, Goods sent on H.P. [at H.P. Price  – W.N:1]	5,28,000	By, Cash Received	4,80,000
To, Goods sent on H.P. [at H.P. Price  – W.N:1]	7,200	By, Goods Repossessed [Unmatured  Installments]	12,000
To, Stock Reserve [2,64,000 × 1/4]	66,000	By, H.P. Stock [at H.P. Price: 31.3.2022-  WN:3]	2,64,000
To, General P/L A/c [ Profit on H.P  transferred	1,18,800	By, H.P. Debtors [ 31.3.2022]	30,000
	9,78,000		9,78,000

Working Notes:

1. Goods sent on H.P. basis ( at H.P. price) 

Memorandum Shop Stock Account

Particulars	(₹)	Particulars	(₹)
To, Opening Balance	30,000	By, Goods sent on H.P [at cost: Bal.  Fig.]	3,96,000
To, Purchases	4,08,000	By, Closing Balance	42,000
	4,38,000		4,38,000

Therefore, Goods Sent on H.P [at H.P price] = 3,96,000 + 33 1/3% = ₹ 5,28,000.

2. Installments Matured during the year

Memorandum H.P Debtors Account

Particulars	(₹)	Particulars	(₹)
To, Opening Balance [Installments due]	18,000	By, Cash Received	4,80,000
To, Installments Matured [Bal. Fig.]	4,92,000	By, Closing Balance [Installments due]	30,000
	5,10,000		5,10,000

3. Balance of H.P. Stock on 31.3.2022

Memorandum H.P. Stock Account

Particulars	(₹)	Particulars	(₹)
To, Opening Balance [ stock out on hire purchase at H.P price]	2,40,000	By, Intsalments Matured [WN:2]	4,92,000
To, Goods sent on H.P [WN:1]	5,28,000	By, Goods Repossessed [Unmatured  installments]	12,000
		By, Closing Balance [Stock with customers at SP – Bal. fig.]	2,64,000
	7,68,000		7,68,000

4. Loss on Repossession = Installments not yet matured on repossessed goods – Value on repossession = 

₹ [12,000 – 4,800] = ₹ 7,200. It is to be debited to H.P. Trading A/c.

Alternatively, Instead of recording value of “Goods Repossessed” and “Loss on Repossession”, the value on repossession ₹ 4,800 may be reflected on the credit side of H.P. Trading A/c.

Method B: Stock-Debtors Method

Books of Beta Ltd. Shop Stock Account 

Dr.					Cr.
Date	Particulars	(₹)	Date	Particulars	(₹)
1.4.21	To, Balance b/f [Opening  Stock at Shop]	30,000	31.3.22	By, Goods Sent on H.P A/c  [Cost Price of goods sent:  Bal. Fig.]	3,96,000
31.3.22	To, Purchases A/c	4,08,000	31.3.22	By, Balance c/f [Closing  Stock at shop]	42,000
		4,38,000			4,38,000

Goods Sent on H.P Account

Dr.					Cr.
Date	Particulars	(₹)	Date	Particulars	(₹)
31.3.22	To, Shop Stock A/c [Cost of goods sent]	3,96,000	31.3.22	By, H.P. Stock A/c [Goods sent at H.P Price]	5,28,000
31.3.22	To, H.P Stock Adjustment  A/c [Loading on goods sent: 3,96,000 × 1/3]	1,32,000
		5,28,000			5,28,000

H.P Stock Account

Dr.					Cr.
Date	Particulars	(₹)	Date	Particulars	(₹)
1.4.21	To, Balance b/f [stock with  customers at H.P Price]	2,40,000	31.3.22	By, H.P. Debtors A/c  [Matured Installments]	4,92,000
31.3.22	To, Goods sent on H.P A/c  [at H.P Price]	5,28,000	31.3.22	By, Goods Repossessed A/c	12,000
			31.3.22	By, Balnace b/f [Stock with  customers at H.P Price: Bal.  Fig]	2,64,000
		7,68,000			7,68,000

H.P. Debtors Account

Dr.					Cr.
Date	Particulars	(₹)	Date	Particulars	(₹)
1.4.21	To, Balance b/f [ Installments  overdue]	18,000	31.3.22	By, Bank A/c [Cash Received]	4,80,000
31.3.22	To, H.P Stock A/c [Matured Installments: Bal.  Fig]	4,92,000	31.3.22	By, Balance b/f [Installments  overdue]	30,000
		5,10,000			5,10,000

H.P. Stock Adjustment Account

Dr.					Cr.
Date	Particulars	(₹)	Date	Particulars	(₹)
31.3.22	To, Goods Repossessed A/c  [Repossession Loss]	7,200		By, Balance b/f [Load on  opening H.P Stock: 2,40,000  × ¼]	60,000
31.3.22	To, General P/L A/c [ H.P  Profit transferred]	1,18,800		By, Goods Sent on H.P A/c  [Load on goods sent:  5,28,000 × ¼]	1,32,000
31.3.22	To, Balance c/f [Load on  Closing H.P Stock: 2,64,000  × ¼]	66,000	31.3.22
		1,92,000			1,92,000

Goods Repossessed Account 

Dr.					Cr.
Date	Particulars	(₹)	Date	Particulars	(₹)
31.3.22	To, H.P Stock A/c [Installments not matured]	12,000	31.3.22	By, H.P. Stock Adj. A/c  [Repossession Loss]	7,200
			31.3.22	By, Balance c/f	4,800
		12,000			12,000

Method C: Final Accounts Method

Books of Beta Ltd.Hire Purchase Trading Account for the year ended 31.3.2022

Dr.			Cr.
Particulars	(₹)	Particulars	(₹)
To, Balance b/f:		By, H.P Slaes [Matured Intsalments – WN:1]	4,92,000
Stock at shop	30,000	By, Balance c/f:
Stock with customer	1,80,000	Stock at Shop	42,000
To, Purchases	4,08,000	Stock with Customer [2,64,000 ×  ¾ ] (WN:2)	1,98,000
To, General P/L A/c  [Profit on H. P. transferred]	1,18,800	Repossessed Goods	4,800
	7,36,800		7,36,800

Working Notes: 

1. Matured Installments during 2021-22:

H.P. Sales Account 

Dr.			Cr.
Particulars	(₹)	Particulars	(₹)
To, H.P. Trading A/c [Matured Installments- B/Fig]	4,92,000	By, Balance b/f: Stock with customer	2,40,000
To, H.P. Sales A/c [Installment due on repossessed goods]	12,000	By, H.P. Debtors A/c  [Goods sold on H.P. basis – WN:3]	5,28,000
To, Balance c/f:
Stock with Customer	2,64,000
	7,68,000		7,68,000

2. Stock with customers at H.P. Price on 31.3.2022: 

H.P. Debtors Account 

Dr.			Cr.
Particulars	(₹)	Particulars	(₹)
To, Balance b/f:		By, Cash A/c [Received during the year]	4,80,000
Stock with Customer	2,40,000	By, H.P. Sales A/c [Installment due  on repossessed goods]	12,000
Installment overdue	18,000	By, Balance c/f:
To, H.P. Sales A/c [Goods sold on H.P. basis – WN:3]	5,28,000	Stock with Customer [Bal. Fig.]	2,64,000
		Installments due	30,000
	7,86,000		7,86,000

3. Goods sent on H.P basis ( at H.P. Price ) during 2021-22 

Cost of goods sent under H.P basis :

Opening Shop Stock + Purchases – Closing Shop Stock

= ₹ [30,000 + 4,08,000 - 42,000] = ₹ 3,96,000

∴ Goods sold on H.P. basis at H.P. Price = Cost of goods sold under H.P. basis + Profit

= ₹ 3,96,000 + 33.33 % = ₹ 5,28,000

 

Exercise

A. Theoretical Questions:

Multiple Choice Questions

1. In the hire purchase system interest charged by vendor is calculated on the basis of 
   (a) Outstanding cash Price
   (b) Hire purchase Price
   (c) Installment amount
   (d) None of the above
   
   
2.  Excess of hire purchase price over cash price is know as 
   (a) Installment
   (b) Cash down payment
   (c) Interest
   (d) Capital value of asset
   
   
3. In Hire Purchase system cash price plus interest is know as 
   (a) Capital value of asset
   (b) Book value of asset
   (c) Hire purchase price of asset
   (d) Hire purchase charges

Answer: 

1

A

2

C

3

C

 B. Numerical Questions

Multiple Choice Questions

1. Shiva purchased a laptop on hire-purchase system. As per terms, he is required to pay `  7,500 down, ` 10,000 at the end of first year, ` 7,500 at the end of second year, and ` 12,500 at the end of third year. Interest is charged at 12% per annum. The interest payable with the installment at the end of second year will be
   (a) ` 900
   (b) ` 1,999
   (c) ` 804
   (d) ` 1,760
   
   
2. Arti Ltd. purchased a machine on hire purchase system for a cash price ` 5,00,000 to be paid as ` 78,700 cash down and the balance by three equal annual installment of `  2,00,000 each. If interest is charged @ 20% per annum then  amount of interest payable in second installment will be
   (a) ` 1,00,000
   (b) ` 61,112
   (c) ` 33,328
   (d) ` 84,260

Answer:

1

B

2

B

CMA book unsolved questions solution

1. Exe Ltd. purchased a truck for ₹ 2,80,000, payment to be made ₹ 91,000 down and 3 installments of ₹ 76,000 each at the end of each year. Rate of interest is charged at 10% p.a. Buyer depreciates assets at 15% p.a. on written down value method.

Because of financial difficulties, Exe Ltd., after having paid down payment and first installment to the end of 1st year could not pay second installment and seller took possession of the truck. Seller, after spending ₹ 9,200 on repairs of the asset sold for ₹ 150,000. Show the relevant accounts in the books of the purchaser & the vendor.

Solution: 

Particulars	Total Cash Price (₹ 000)	Instalment Paid @ 10% INT (₹ 000)	Interest Paid (₹ 000)	Paid towards Cash Price (Instalment - Interest) (₹ 000)
	280
Down Payment	91	91	0	91
	189
End of 1st year	57.1	76	18.9	57.1
	131.9
End of 2nd Year	62.81	76	13.19	62.81
	69.09
End of 3rd Year	69.09	76	6.91	69.09
Total	0.0	319	39	280

In the Books of Exe Ltd.

Car Account

Dr.					Cr.
Date	Particulars	Amount (₹ 000)	Date	Particulars	Amount (₹ 000)
1st Year	To Vendor A/c	280		By Depreciation A/c	42
				By Bal c/d	238
		280			280
2nd Year	To Bal b/d	238		By Depreciation A/c	35.7
				By Vendors A/c	145.09
				By P/L A/c (Bal. Figure)	57.21
		238			238

Vendors Account

Dr.					Cr.
Date	Particulars	Amount (₹ 000)	Date	Particulars	Amount (₹ 000)
1st Year	To Bank (Down Payment)	91		By Car (Cash Price) A/c	280
	To Bank (Instalment)	76		By Interest A/c	18.9
	To Bal c/d	131.9
		298.9			298.9
2nd Year	To Asset A/c (Default-Assets taken over)	145.09		By Balance b/d	131.9
				Interest A/c	13.19
		145.09			145.09

In the Books of Vendor

Exe Ltd. Account

Dr.					Cr.
Date	Particulars	Amount (₹ 000)	Date	Particulars	Amount (₹ 000)
1st Year	To Hire Purchase Sales A/c	280		By Bank (Down) A/c	91
	To Interest A/c	18.9		By Bank (Instalment) A/c	76
				By Balance c/d	131.9
		298.9			298.9
2nd Year	To Balance b/d	131.9		By Goods Repossessed A/c	145.09
	To Interest A/c	13.19
		145.09			145.09

Goods Repossessed Account

Dr.					Cr.
Date	Particulars	Amount (₹ 000)	Date	Particulars	Amount (₹ 000)
	To Exe Ltd. A/c (Purchaser) A/c	145.09		By Bank (Sales) A/c	150
	To Bank (Repairing Charge) A/c	9.2		By P/L A/c (Bal Figure)	4.29
		154.29			154.29

2. Rudra Transporter purchases a truck on hire-purchase from Sarkar Motor for 56,000. Payment to be made as 15,000 down cash and 3 installments of 15,000 each at the end of each year. Rate of interest is charged at 5% p.a. Buyer depreciates assets at 10% p.a. on written down value method. Because of financial difficulties Rudra Transporter after having paid the down cash and the first installment at the end of the first year could not pay the second installment and Sarkar motors took possession of the Truck.

Prepare (a) The Truck Account (b) Seller’ Account in the books of the buyer assuming that year ends on 31st December.

Solution:

Working Note:

Calculation of Interests

	Amount
Opening date (First year)	56,0000
Cash price	15,000
Same date Less:	41,000
	2,050
Down Payment	43,050
	15,000
Add: Interest for the first year[5%of 41,000]	28,050
Less: Installment
Add: Interest [5%of 28,050]	1,403
Surrendered Asset	29,453

In the Books of Rudra Transporter

Truck Company

Date	Particulars	Amount	Date	Particulars	Amount
1st yr. Op.Dt	To Sarkar Motor	56,000	At yr. end	By Depreciation A/c @10%	5,600
				By Balance c/d	50,400
		56,000			56,000
2nd yr. Op. dt.	To Balance B/d	50,400		By Depreciation	5,040
				By Sarkar Motor (surrender)	29,453
				By Profit &Loss A/c	15,907
		50,400			50,400

Sarkar Motor Account

Dr.					Cr.
Date	Particulars	Amount	Date	Particulars	Amount
1st yr Op. dt Cl.dt.	To Bank A/c	15,000	1st yr Op.dt.	By Truck A/c	56,000
	To Bank A/c	15,000		By Interest A/c	2,050
	To Balance B/d	28,050
		58,050			58,050
Cl.dt.	To Machinery A/c (Balance transferred)	29,453	Op.dt. 2nd yr. Cl.dt.	By Balance B/d	28,050
				By Interest	1,403
		29,453			29,453

3. Ashis purchased 7 Machines on hire-purchase on 1st July 2021. The Cash Price of each Truck was 50,000. He was to pay 20% of Cash Price at the time of delivery and the balance of five half yearly installments starting from 31.12.2021 with interest at 5% per annum. On Ashis’s failure to pay the installment due on 30th June, 2022, it was agreed that Ashis would return 3 Machines to the Vendor and the remaining 4 would be retained by him. The returning price of 3 Machines was 40,500. Ashis charges depreciation @ 20% per annum. Vendor after spending 1,000 on repairs sold away all the three Machines for 40,000.

Show Machines Account and Vendor’s Account in the books of Ashis and Ashis’s Account and Goods Repossessed Account in the books of the Vendor assuming that their books are closed on 30th June each year.

Solution:

In the Books of Ashis

Machines Account

Dr.					Cr.
Date	Particulars	Amount	Date	Particulars	Amount
1.07.21	To Hire Vendor A/c (Cash price of 7 Machines @ 50,000 each)	3,50,000	3.06.22	By Depreciation A/c [20% of 3,50,000]	70,000
				By Hire Vendor A/c (Adjustment for 3 Machines at a agreed value)	40,500
				By Profit & Loss Account (Loss on Surrender)	79,500
				By Balance c/f [4/7 of (3,50,000-70,000]	1,60,000
		3,50,000			3,50,000

Hire Vendor Account

Dr.					Cr.
Date	Particulars	Amount	Date	Particulars	Amount
1.07.21	To Bank A/c [Down Payment @20% of 3,50,000]	70,000	1.07.21	By Machines A/c	3,50,000
31.12.21	To Bank A/c [Working Note]	63,000	31.12.21	By Interest A/c [5%of (3,50,000 –70,000) for ½ year]	7,000
30.06.22	To Machines A/c (Adjustment for 3 Machines at agreed value) Balance c/f	40,500	30.6.22	By Interest A/c [working Note]	5,600
		1,89,100
		3,62,600			3,62,600

In the Books of Hire Vendor

Ashis Account

Dr.					Cr.
Date	Particulars	Amount	Date	Particulars	Amount
1.07.21	To Hire Purchase Sales A/c [Down Payment @ 20% of 3,50,000]	3,50,000	1.7.21	By Bank A/c [20% of 3,50,000]	70,000
31.12.21	To Interest A/c	7,000	31.12.21	By Bank A/c	63,000
30.6.22	To Interest A/c [Working Note]	5,600	30.6.22	By Goods Repossessed A/c [Agreed value]	40,500
				By Balance c/f	1,89,100
		3,62,600			3,62,600

Goods Repossessed Account

Dr.					Cr.
Date	Particulars	Amount	Date	Particulars	Amount
30.06.22	To Ashis A/c	40,500	30.6.22	By Bank A/c (Sale Proceeds)	40,000
	To Bank A/c (cost of repairs)	1,000		By Profit & Loss A/c (Loss on Sale )	1,500
		41,500			41,500

Working Notes:

1. Value of each Bare Installment [i.e. exclusive of interest]

= Amount Payable by Installments/ No. of Installments

= 80% of 3,50,000/5

= 56,000

2. Calculation of Interest

		Amount
1.7.2021	Cash Price	3,50,000
	Less: Down Payment	70,000
		2,80,000
31.12.2021	Add: Interest @ 5% p.a. [5/100*2,80,000*6/12]	7,000
		2,87,000
	Less: Half Yearly Installment [56,000+7,000]	63,000
		2,24,000
30.06.2022	Add: Interest [2,24,000*5/100*6/12]	5,600
	Loss on Surrender & Value of Machines Retained
	Machines Retained [4]	Machines Retained [3]
Value on 1.7.21	4*50,000 = 2,00,000	3*50,000=1,50,000
Depreciation on 30.06.22 @ 20%	40,000	30,000
W.D. Value on 30.06.22	1,60,000	1,20,000
Agreed Value		40,500
Loss on Surrender		79,500

Special Note: The question does not state that although Ashis retained 4 Machines, whether he paid the proportionate Amount of inst6alment on those 4 Machines on 30.6.22. It is assumed that he did not pay anything. So the entire balance is due from him.

4. Go-kart Logistics acquired a delivery van on hire purchase on 01.04.2022 from Ashima Enterprises. The terms were as follows:

Particulars	Amount (₹)
Hire Purchase Price	1,80,000
Down Payment	30,000
1st Installment payable after 1 year	50,000
2nd installment after 2 years	50,000
3rd inatallment after 3 years	30,000
4th installment after 4 years	20,000

Cash price of van ₹ 1,50,000 You are required to calculate Total Interest and Interest included in each instalment.

Solution:

Calculation of total Interest and Interest included in each instalment

Hire Purchase Price (HPP) = Down Payment + instalments = 30,000 + 50,000 + 50,000 + 30,000 + 20,000 = 1,80,000

Total Interest = 1,80,000 – 1,50,000 = 30,000

Computation of IRR (considering two guessed rates of 6% and 12%)

Year	Cash flow	DF @6%	PV	DF @ 12%	PV
0	30,000	1.00	30,000	1.00	30,000
1	50,000	0.94	47,000	0.89	44,500
2	50,000	0.89	44,500	0.80	40,000
3	30,000	0.84	25,200	0.71	21,300
4	20,000	0.79	15,800	0.64	12,800
		NVP	1,62,500	NPV	1,48,600

Interest rate implicit on lease is computed below by interpolation:

Interest rate implicit on lease =  = 11.39%.

Thus, repayment schedule and interest would be as under :

Instalment No.	Principle at beginning	Interest included in each instalment	Gross amount	Instalment	Principal at end
Cash down	1,50,000		1,50,000	30,000	1,20,000
1	1,20,000	13,668	1,33,668	50,000	83,668
2	83,668	9,530	93,198	50,000	43,198
3	43,198	4,920	48,118	30,000	18,118
4	18,118	2,064	20,182	20,000	182*
		30,182*
*the difference is on account of approximations.