hire purchase accounting
TRANSCRIPT
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Hire Purchase Accounts
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Hire Purchase
Hire Purchase (HP) is one of thepayment methods of which the buyer
use the goods without immediate fullsettlement of the price of the goods
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With Hire Purchase Agreement
The HP selling price includes normalCash Price PLUS HP Interest
The seller agreed that the buyer couldhire the goods by payments of depositand instalments
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Hire Purchase Price
= Cash Price + Total Hire Purchase Interest
OR
= Deposit
(Down payment) +
Outstanding Balance
(including HP interestpaid by instalments
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Calculation of Hire PurchaseInterest
(a) Straight line method
(b) Actuarial Method
(c) Sum-of-digits Method
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Straight Line Method(Equal apportionment)
Interest is apportioned evenly over thenumber of installments agreed upon.
HP Interest per instalment
= Total HP Interest
Number of total instalments
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Example 1
An asset is acquired on the followingterms:
Cash price $9000
Down payment $1000
HP Price $12200
Nominal rate of interest 10%
Four annual instalments $2800
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Total HP interest = $12000-$9000 =$3200
HP interest payable per annum = $3200/4 = $800
OR
An alternative way to calculate hire purchase interest
($9000-$1000)*10% = $800
Year HP interest Capital Instalments
$ $ $
12
3
4
800800
800
800
28002800
2800
2800
20002000
2000
2000
+ =
Answer:
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B. Actuarial Method
Interest is charged on the outstandingbalance of the cash price after the down
payment is made.1. Equal instalments
2. Unequal instalment
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1 Equal instalment
Example 2
An asset is acquired on the following terms: Cash price $9000
Down payment $1000
HP price $11096 Interest 10% on outstanding balance
Four annual instalment $2524
Equal instament = HP priceDown payment
No. of instalment
(11096-1000)/4
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Year HP interest Capital Instalments
$ $ $
1
2
3
4
(9000-1000)*10% =800 2524
2524
2524
2524
1724
(8000+800-2524)*10%=628 1896
(6276+628-2524)*10%=438 2086
(4380+438-2524)*10%=230 2294
6276
4380 2096 8000 10096
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Unequal instalment
Example 3
An asset is acquired on the following terms:
Cash price $9000
Down payment $1000
HP price $11000 Interest 10% on outstanding balance
Four annual instament $2000+interest
Unequal instalment=Cash price-Down payment+Interest accrued
No. of instalment (i.e.unpaid interest)
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Year HP interest Capital Instalments
$ $ $
1
2
3
4
(9000-1000)*10% =800 2800
(8000+800-2800)*10%=600
(6000+600-2600)*10%=400
(4000+400-2400)*10%=200
6000
4000 2000 8000 10000
2000
2000
2000
2000
26002400
2200
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C. Sum of Digits Method
The HP interest is apportioned accordingto the digit assigned (descending order)
Using this method, more interest ischarged in the earlier periods, lessinterest is charged in the later periods.
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HP interest per instalment= Total HP interest* Digit assigned in the instalment
Sum-of-digits of total instalment
When n = number of instalments
Sum of digits = n(n+1)2
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Example 4
A motor vehicle was purchased under a hire purchase
agreement Cash price $10000
Hire Purchase $13600
Instalments 4 months
Date of sale 1 October 1996 Calculate the interest under each of the three cases:
(a) First instalment due at the end of month from thedate of sale
(b) First instalment due at the beginning of monthfollowing the date of sale
(c) First instalment due at the date of sale.
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Case (a) and (b)
Interest paid
1st instalment $3600*4/10=$14402nd instalment $3600*3/10=$1080
3rdinstalment $3600*2/10=$720
4thinstalment $3600*1/10=$360
Total HP interest =$13600-$10000=$3600
Sum of digit= 4*(4+1)/2=10
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Case ( C )
Interest paid
1st instalment $3600*3/6=$18002nd instalment $3600*2/6=$1200
3rdinstalment $3600*1/6=$600
4thinstalment -
Total HP interest =$13600-$10000=$3600
Sum of digit= 3*(3+1)/2=6
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Concept Chart
Hire Purchase
Buyer Seller
Assets
accountHire purchase
interest account
Hire purchase
creditors account
Hire purchaseinterest suspense
account
Hire purchase
sales
Provisionfor unrealized
profit
Hire purchase
debtors account
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Purchasers Books
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Acquisition of Assets on Hire Purchase
When an asset is acquired on hirepurchase, there are 2 ways to account forthis in the purchasers books.
1. Progress interest charge system
2. Interest Suspense Method
They differ mainly in the way they record
hire purchase interest.
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2 Method of HP Interest
Treatment
(i) Progress interest charge system
(ii) Interest suspense method
* 3 method of HP Interest
Apportionment
(i) Straight-line method
(ii) Actuarial method
(iii)Sum-of-digit method
= 6 Version
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Progress interest charge system
Interest is charged upon each instalment.
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Dr Fixed assets
Cr HP Creditor
With cash price of assets (at the
date of purchase)
Dr HP Creditor
Cr Bank
With deposit and instalment paid
Dr HP Interest
Cr HP Creditor
With hire purchase interest
accrued for the current year (at the
year end)Dr Profit and Loss
(expense)
Cr HP Interest
With the amount of hire purchase
interest transferred to current
years profit and loss account
Dr Profit and Loss
Cr Provision for
depreciation
Annual depreciation charged on
full cash price of the asset
Progress interest charge system:
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Notes :
Cut off of the financial period should be aware in order tocalculate the total hire purchase interest of the financial period
to be reflected in the P/L account as an expense item
Each financial year may include up to 12 monthly instalment,
4 quarterly instalment or 2 half-yearly instalment
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Balance Sheet Presentation
For instance: after 1stinstalment Paid
Progress interest charge system:
Balance Sheet ( Instalment for 1st year)
Current Liabilities
HP Creditor (Instalment for 2ndyear)
$
X
Long term Liabilities
HP Creditor (Instalment for 3rdyear and so on)X
Instalment for 2ndyearInterest payable for 2ndyear
Outstanding HP creditorHP creditor on current liabilities
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For instance: after 1stinstalment Paid
Interest Suspense Method:
Balance Sheet ( Instalment for 1st year)
Current Liabilities
HP Creditor (Instalment for 2ndyear)
$
X
Long term LiabilitiesHP Creditor (Instalment for 3rdyear and so on) X
Less HP interest suspense (X)
Less HP interest suspense (X)
X
X
Outstanding HP creditorInstalment for next year
Outstanding interest suspenseinterest
Payable for 2ndyear
Interest payable for 2ndyear
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Example
Refer to textbook P.24
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Example 6 ABC Ltd. purchased a vehicle from Grace Ltd. on 1
Jan 1996 on HP agreement. The details were asfollows
Cash price $9000
Down payment $1000
HP Price $11096
Nominal rate of interest 10% on outstanding balance
Four equal annual instalments
First due 31 Dec 1996 Depreciation 10% on cost
Using (a) the progress interest charge systemand(b) interest suspense method, show transactions in
books of ABC Ltd.
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Total HP interest= HP priceCash Price= 110969000
= 2096
Equal instalments = (110961000)/4
=2524
Answer (a):
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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 2,52431/12 Balance c/d 6,276
9,800 9,800
Hire Purchase Interest
31/12/96 HP Creditor 800 31/12/96 P/L 800
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Balance Sheet as at 31 Dec (Extract)
Fixed Assets 96
VehicleLess Pro for Dep
Current Liabilities
HP Creditor
9000
900
8100
1896
2524-628
Long Term Liabilities
HP Creditor 4380
6276-1896
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Hire purchase Creditor (Grace Ltd)
1/1/96 Vehicle 9,0001/1/96 Bank-deposit 1,000
31/12 HP Interest 80031/12 Bank-instalment 2,524
31/12 Balance c/d 6,276
9,800 9,800
1/1/97 Balance b/d 6,276
31/12 HP Interest (6276*10%) 628
31/12 Bank-instalment 2,524
6,904
31/12 Balance 4,380
6,904
Hire Purchase Interest
31/12/97 HP Creditor 628 31/12/97 P/L 628
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Balance Sheet as at 31 Dec (Extract)
Fixed Assets 96
Vehicle
Less Pro for Dep
Current Liabilities
HP Creditor
9000
900
8100
97
9000
1800
7200
2086
Long Term Liabilities
HP Creditor
1896
4380
2524-438
2294
4380-2086
Hire purchase Creditor (Grace Ltd)
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Hire purchase Creditor (Grace Ltd)
1/1/96 Vehicle 9,0001/1/96 Bank-deposit 1,000
31/12 HP Interest 80031/12 Bank-instalment 2,524
31/12 Balance c/d 6,276
9,800 9,800
1/1/97 Balance b/d 6,276
31/12 Hp Interest 628
31/12 Bank-instalment 2,524
6,90431/12 Balance 4,380
6,904
1/1/98 Balance b/d 4,380
31/12 HP interest(4380*10%) 438
31/12 Bank-instalment 2,524
31/12 Balance 2,294
4,8184,818
Hire Purchase Interest
31/12/98 HP Creditor 438 31/12/98 P/L 438
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Balance Sheet as at 31 Dec (Extract)
Fixed Assets 96
Vehicle
Less Pro for Dep
Current Liabilities
HP Creditor
9000
900
8100
1896
97
9000 9000
98
1800 2700
7200 6300
2086 2294
Long Term Liabilities
HP Creditor 4380 2294
2524-230
-
2294-2294
Hire purchase Creditor (Grace Ltd)
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Hire purchase Creditor (Grace Ltd)
1/1/96 Vehicle 9,0001/1/96 Bank-deposit 1,00031/12 HP Interest 80031/12 Bank-instalment 2,524
31/12 Balance c/d 6,276
9,800 9,800
1/1/97 Balance b/d 6,276
31/12 Hp Interest 628
31/12 Bank-instalment 2,524
6,904
31/12 Balance 4,380
6,904
1/1/98 Balance b/d 4,38031/12 HP interest(4380*10%) 438
31/12 Bank-instalment 2,52431/12 Balance 2,294
4,8184,818
1/1/99 Balance b/d 2294
31/12 HP interest(2294*10%) 230
31/12 Bank-instalment 2,524
25242524
Hire Purchase Interest
31/12/99 HP Creditor 230 31/12/99 P/L 230
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Balance Sheet as at 31 Dec (Extract)
Fixed Assets 96
Vehicle
Less Pro for Dep
Current Liabilities
HP Creditor
9000
900
8100
1896
97
9000 9000 9000
98 99
1800 2700 3600
7200 6300 5400
2086 2294 -
Long Term Liabilities
HP Creditor 4380 2294 - -
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Interest is recorded all together at thebeginning of hire purchase agreement
and charge proportionally to the profitand loss account every year.
Interest Suspense Method
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Dr Fixed assets
Dr HP Interest SuspenseCr HP Creditor
With the cash price of assets
With total hire purchase interestWith the hire purchase price
(at the date of purchase)
Dr HP Creditor
Cr Bank
With deposit and installments paid
Dr HP Interest
Cr HP Interest Suspense
With hire purchase interest accruedfor the current year (at the year end)
Dr Profit and Loss
Cr HP Interest
With the amount of hire purchase
interest transferred to current yearsprofit and loss account.
Dr Profit and Loss
Cr Provision fordepreciation
Annual depreciation charged basedon full cash price of the asset.
Interest Suspense Method:
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Example
Refer to textbook P.24
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Example 6 ABC Ltd. purchased a vehicle from Grace Ltd. on 1
Jan 1996 on HP agreement. The details were asfollows
Cash price $9000
Down payment $1000
HP Price $11096
Nominal rate of interest 10% on outstanding balance
Four equal annual instalments
First due 31 Dec 1996 Depreciation 10% on cost
Using (a) the progress interest charge system and (b)interest suspense method, show transactions in
books of ABC Ltd.
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Answer (b):
Total HP interest= HP priceCash Price= 110969000
= 2096
Equal instalments = (110961000)/4
=2524
Hire purchase Creditor (Grace Ltd)
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p ( )
1/1/96 Vehicle 9,0001/1/96 Bank-deposit 1,00031/12 Bank-instalment 2,524
31/12 Balance c/d 7572
9,800 9,800
1/1/96 HP Interest Suspense 2096
(11096-9000)
Hire Purchase Interest
31/12/96 HP suspense 800 31/12/96 P/L 800
HP Interest Suspense31/12/96 HP Interest 800
(9000-1000)*10%
1/1/96 HP Creditor 2096
31/12/96 Bal c/d 1296
2096 2096
B l Sh t t 31 D (E t t)
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Current Liabilities
HP Creditor
Balance Sheet as at 31 Dec (Extract)
96
Long Term Liabilities
HP Creditor
Less HP interest suspense25246281896
Less HP interest suspense
5048668
4380
7572-2524
(7572-1296)*10%
1296-628
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Hire purchase Creditor (Grace Ltd)
1/1/96 Vehicle 9,0001/1/96 Bank-deposit 1,00031/12 Bank-instalment 2,524
31/12 Balance c/d 7572
9,800 9,800
1/1/97 Balance b/d 757231/12 Bank-instalment 2,524
6,904
31/12 Balance c/d 5048
6,904
1/1/96 HP Interest Suspense 2096
HP Interest Suspense
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p31/12/96 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 Interest
31/12/97 HP Creditor 628 31/12/98 P/L 628
B l Sh t t 31 D (E t t)
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Current Liabilities
HP Creditor
Balance Sheet as at 31 Dec (Extract)
96 97
Long Term Liabilities
HP Creditor
Less HP interest suspense2524628
2524438
1896 2086
Less HP interest suspense
5048 2524668 230
4380 2294
5048-2524
(5048-668)*10%
668-438
Hire purchase Creditor (Grace Ltd)
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p ( )
1/1/96 Vehicle 9,0001/1/96 Bank-deposit 1,00031/12 Bank-instalment 2,524
31/12 Balance c/d 7572
9,800 9,800
1/1/97 Balance b/d 757231/12 Bank-instalment 2,524
6,904
31/12 Balance c/d 5048
6,904
1/1/98 Balance b/d 504831/12 Bank-instalment 2,52431/12 Balance c/d 2524
4,8184,818
1/1/96 HP Interest Suspense 2096
HP Interest Suspense
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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 668
2096 2096
31/12/98 Bal c/d 230
Hire Purchase Interest
31/12/98 HP Creditor 438 31/12/98 P/L 438
Balance Sheet as at 31 Dec (Extract)
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Current Liabilities
HP Creditor
Balance Sheet as at 31 Dec (Extract)
96 97 98
Long Term Liabilities
HP Creditor
Less HP interest suspense2524628
2524 2524438 230
1896 22942086
Less HP interest suspense
5048 2524668 230
--
4380 2294 -
2524-2524
(2524-230)*10%
230-230
Hire purchase Creditor (Grace Ltd)
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1/1/96 Vehicle 9,0001/1/96 Bank-deposit 1,00031/12 Bank-instalment 2,524
31/12 Balance c/d 7572
9,800 9,800
1/1/97 Balance b/d 757231/12 Bank-instalment 2,524
6,904
31/12 Balance c/d 5048
6,904
1/1/98 Balance b/d 504831/12 Bank-instalment 2,52431/12 Balance c/d 2524
4,8184,818
1/1/99 Balance b/d 252431/12 Bank-instalment 2,524
25242524
1/1/96 HP Interest Suspense 2096
HP Interest Suspense
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31/12/96 HP Interest 800
(9000-1000)*10%
1/1/96 HP Creditor 2096
31/12/96 Bal c/d 1296
2096 209631/12/97 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 668
2096 2096
31/12/98 Bal c/d 230
31/12/98 HP Interest 230
(5048-668)*10%
1/1/99 Bal b/d 230
Hire Purchase Interest
31/12/99 HP Creditor 230 31/12/99 P/L 230
Balance Sheet as at 31 Dec (Extract)
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Current Liabilities
HP Creditor
Balance Sheet as at 31 Dec (Extract)
96 97 98 99
Long Term Liabilities
HP Creditor
Less HP interest suspense2524628
2524 2524 -438 230 -
1896 22942086 -
Less HP interest suspense
5048 2524668 230
--
-
-
4380 2294 - -
i i f i h
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B. Termination of a Hire Purchase
Agreement The buyer can terminate the hire purchase
agreement earlier by paying balance earlierthan the last installment date.
However, the buyer may also be forced toterminate the agreement earlier if the asset isscrapped due to its use.
Upon the termination of a hire purchaseagreement, a number of entries should bemade in the books.
The accounting treatments differ, dependingon which method is used to record hirepurchase interest.
1 P i t t h t
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1. Progress interest charge systemSummary of procedures
Dr HP creditorCr Bank
With the last payment to the HPcreditor
Dr HP interest
Cr HP creditor
With the HP interest and penaltycharges for early termination of thehire purchase contract
Dr DisposalCr Asset
With the cost of the asset
Dr Provision for depreciation
Cr Disposal
Transferring related depreciationprovision to the disposal account
Dr BankCr Disposal
With the insurance claim for thedisposal (if any)
Dr Profit and Loss
Cr Disposal
With the loss on the disposal(Reverse the entries for a profit ondisposal)
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Example 7
Example 7
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Example 7 Cash Price $5000
Prov for dep $3200
( A full year dep is charged in the year of purchase, but nonein the year of disposal)
HP creditor on 1 Jan 1996 $1800
Instalments $250(monthly)
Interest $50
The car was involved in an accident in May 1996resulting in a total write off, and the sum of $1000was received from the insurnance company.
All instalments up to and including 31 May werepaid.
A payment of $930 was made on 30 June 1996 infull settlement
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HP Creditor
1996 $ 1996 $
May 31 Bankinstalment 1250($250*5) Jan 1 Bal b/f 1800Dec 31 HP interest 300
($50*6)June30 Bank-settlement 930Dec 31 HP interest
-penalty 80
2180 2180
HP interest
1996 $ 1996 $Dec 31 HP Creditor
(300+80) 380 Dec 31 P/L 380
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Disposal of Vehicle
1996 $ 1996 $
Jun 30 Vehicle 5000
Dep - Vehicle
Vehicle
1996 $ 1996 $
1996 $ 1996 $
Jan b/f 5000 Jun 30 Disposal 5000
Jan 1 B/f 3200Jun 30 Disposal 3200
Jun 30 Dep 3200
Jun 30 Bank
- insurance 1000Dec 31 P/L - loss 800
5000 5000
I t t th d
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2. Interest suspense methodSummary of procedures
Dr HP CreditorCr Bank
With the last payment to the HP creditor
Dr HP interestCr HP interest suspense
With the HP interest for the current year
Dr HP CreditorCr Disposal
With any outstanding balance in the HPcreditor account
Dr DisposalCr HP Interest suspense
With any outstanding balance in the HPinterest suspense account
Dr DisposalCr Asset
With the cost of the asset
Dr Prov. for Depn.
Cr Disposal
Transferring the related depreciation
provision to the disposal accountDr BankCr Disposal
With the insurance claim for the disposal(if any)
Dr Profit and LossCr Disposal
With the loss on the disposal (Reverse theentries for a profit on disposal)
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Example 8
Example 8
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Example 8 Cash Price $5000
Prov for dep $3200
( A full year dep is charged in the year of purchase, but nonein the year of disposal)
HP creditor on 1 Jan 1996 $2250
Instalments $250(monthly)
Interest $50
HP interest suspense $450
The car was involved in an accident in May 1996 resulting ina total write off, and the sum of $1000 was received from theinsurnance 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 Creditor
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1996 $ 1996 $
May 31 Bankinstalment 1250
($250*5)
Jan 1 Bal b/f 2250
June30 Bank-settlement 930
2250 2250
HP interest
1996 $ 1996 $
Dec 31 HP Creditor 300 Dec 31 P/L 300
Jun 30 Disposal 70
HP interest suspense1996 $ 1996 $
Jan 1 Bal/f 450 Jun 30 HP interest(60*5) 300
Jun 30 Disposal 150
450 450
Disposal of Vehicle
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1996 $ 1996 $
Jun 30 Vehicle 5000
Dep - Vehicle
Vehicle
1996 $ 1996 $
1996 $ 1996 $
Jan b/f 5000 Jun 30 Disposal 5000
Jan 1 B/f 3200Jun 30 Disposal 3200
Jun 30 Dep 3200
Jun 30 Bank
- insurance 1000
Dec 31 P/L - loss 8805000 5000
Jun 30 HP Creditor 70
Jun 30 HP interest
Suspense 150
Include the penalty charge $80
For early termination of HP
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Sellers Book
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2 Method of HP Interest
Treatment
(i) Profit Suspense Method(ii) HP Interest Suspense Method
* 3 method of HP Interest
Apportionment
(i) Straight-line method
(ii) Actuarial method
(iii)Sum-of-digit method
= 4 Version
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Hire Purchase Profit
HP profit= HP priceCash selling Price
Gross profit=Cash price-Cost of good
sold Total Profit=HP profit+Gross profit
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Interest Suspense Method
The characteristics of the interest suspensemethod are:
1. The hire purchase sale is recorded at the cash price
2. Profit is recognized immediately in the year of sale.3. The gross profit and interest income are accounted
for separately.
4. Interest income is allocated over the period of the
hire purchase agreement on a suitable basis.5. Only the amount of hire purchase interest receivable
in the current period is taken into account.
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Summary of procedures
Dr HP debtorsDr HP Sales
With the cash selling priceof thesale.
Dr HP debtor
Cr HP interest suspense
With the total HP interest
Dr BankCr HP debtors
With the deposit and installmentsreceived
Dr HP interest suspense
Cr HP interest / P&L(income)
With the hire purchase interestreceivable for the current period
Dr HP Sales
Cr HP Trading
Transfer the HP sales to HP trading
account
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Example 9
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Example 9
A company selling on HP has the following details: The interest is accrued evenly throughout the period
of HP agreement
The gross profit on the sales is recognized in the yearof sales
Sales volume 2 units
Date of sale 1 Jan 1996
Cash price $1200
HP price $2000
Cost $1000
Down payment NIL
Instalments $250*8 quarterly
First due 31 Mar 1996
HP Debtors1996 $ 1996 $
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1996 $ 1996 $Jan 1 HP Sales
($1200*2) 2400Jan 1 Interest suspense 1600
(2000-1200)*2
Dec 31 Bank-instalment
($250*4*2) 2000Dec 31 Bal c/d 2000
4000 4000HP Sales
1996 $ 1996 $
Dec 31 HP Trading 2400 Jan 1 HP Debtors 2400
HP interest suspense
1996 $ 1996 $Dec 31 HP interest
received
(2000-1200)*4/8*2 800
Jan 1 HP Debtors 1600
Dec 31 Bal c/d 8001600 1600
Cash price
HP interest received
1996 $ 1996 $Dec 31 P/L 800 Jan 1 HP int suspense 800
Trading and profit and loss account for the year ended (Extract)
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Trading and profit and loss account for the year ended (Extract)
Sales (cash price)
$
96
2400Less: cost of goods sold 2000
400HP Gross profit
Add: HP interest received 800
Balance Sheet as at 31 Dec (Extract)
$
96
Current AssetsHP Debtors
Less Interest suspense
2000
800
1200
HP Debtors
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1996 $ 1996 $Jan 1 HP Sales
($1200*2) 2400
Jan 1 Interest suspense 1600
(2000-1200)*2
Dec 31 Bank-instalment
($250*4*2) 2000
Dec 31 Bal c/d 2000
4000 4000
1997 1997
Jan 1 Bal b/d 2000 Dec 31 Bank- instalment 2000
HP interest suspense
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1996 $ 1996 $
Dec 31 HP interest
received(2000-1200)*4/8*2 800
Jan 1 HP Debtors 1600
Dec 31 Bal c/d 800
1600 1600
1997 1997Dec 31 HP interest 800
received
(2000-1200)*4/8*2
Jan 1 Bal b/d 800
Interest received
1996 $ 1996 $
Dec 31 HP interest suspense 800Dec 31 P/L 800
Trading and profit and loss account for the year ended (Extract)
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Trading and profit and loss account for the year ended (Extract)
Sales (cash price)
$ $
96 97
$ $
2400Less: cost of goods sold 2000
400HP Gross profit
Add: HP interest received 800
--
-
800
Balance Sheet as at 31 Dec (Extract)
$ $
96 97
Current AssetsHP Debtors
Less Interest suspense
2000
800
1200
-
-
-
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B. Profit suspense method
The profit suspense method has thefollowing characteristics:
1. The hire purchase sale is recorded at thehire purchase price.
2. The profit is recognized in proportion ofthe amount collected.
3. The gross profit and the interest incomeare not accounted for separately.
Summary of procedures:
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y p
Dr HP Debtors
Dr HP Sales
With the hire purchase price.
Dr BankCr HP Debtors
With the deposit and instalmentsreceived
Dr HP Sales
Cr HP Trading
Transfer the HP Sales to HPTrading a/c
Dr HP Trading
Cr Provision for Unrealizedprofit
With the increase in the provisionfor unrealized profit.
*Transfer the unearned totalprofit ( unearned HP profit &unearned GP)
Dr Provision for Unrealizedprofit
Cr HP trading
With the decrease in theprovision for unrealized profit.
* Transfer the unearned totalprofit (unearned HP profit &unearned GP)
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Provision for unrealized profit
= Total Profit * instalments not yet received
HP price
= (HP priceCost) * Instalments not yet received
HP price
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Example 10
E l 10
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Example 10
A company selling on HP has the following details: The gross profit on the sales is recognized on the
basis of the cash received
Sales volume 2 units
Date of sale 1 Jan 1996
Cash price $1200
HP price $2000
Cost $1000
Down payment NIL
Instalments $250*8 quarterly
First due 31 Mar 1996
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Required:
Account prepared according to the following assumptions:
(a) All instalments were received for the years ended 31 Dec
1996 and 1997
(b) All instalments were received for the years ended 31 Dec1996 and 1997, except one in arrears as at 31 Dec 1996
which was received in 1997
HP DebtorsHP Price(a)
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1996 $ 1996 $Jan 1 HP Sales
($2000*2) 4000
Dec 31 Bank-instalment
($250*4*2) 2000Dec 31 Bal c/d 2000
4000 4000
Provision for unrealized profit
1996 $ 1996 $Dec 31 Bal c/d 1000
($4000-2000)*2000/4000
Dec 31 HP Trading 1000
Trading and profit and loss account for the year ended (Extract)
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Trading and profit and loss account for the year ended (Extract)
Sales (HP price)
$ $
96
4000Less: cost of goods sold 2000
1000Gross profit
Balance Sheet as at 31 Dec (Extract)96
Current AssetsHP Debtors
Less Provision for unreaslised
profit
20001000
1000
Less:Provision for unrealised
profit 1000
HP DebtorsHP Price(a)
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1996 $ 1996 $Jan 1 HP Sales
($2000*2) 4000
Dec 31 Bank-instalment
($250*4*2) 2000Dec 31 Bal c/d 2000
4000 40001997 1997
Jan 1 Bal b/d 2000 Dec 31 Bank- instalment 2000
Provision for unrealized profit
1996 $ 1996 $Dec 31 Bal c/d 1000
($4000-2000)*2000/4000
Dec 31 HP Trading 1000
1997 $ 1997 $Dec 31 HP Trading 1000 Dec 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)
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g p y ( )
Sales (HP price)
$ $
96 97
$ $
4000
Less: cost of goods sold 2000
Gross profit
-
Balance Sheet as at 31 Dec (Extract)
$ $
96 97
Current Assets
HP Debtors
Less Provision for unrealized
profit
20001000
1000
-
-
-
Less:Increase Provision forunrealized profit
1000
1000Add: Decrease in prov.for unrealized
profit
1000 1000
HP DebtorsHP Price(b)
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1996 $ 1996 $Jan 1 HP Sales
($2000*2) 4000
Dec 31 Bank-instalment
($250*4*2-250) 1750Dec 31 Bal c/d 2250
4000 4000
Provision for unrealized profit
1996 $ 1996 $Dec 31 Bal c/d 1125
($4000-2000)*2250/4000
Dec 31 HP Trading 1125
Trading and profit and loss account for the year ended (Extract)
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g p y ( )
Sales (HP price)
$ $
96
4000Less: cost of goods sold 2000
875Gross profit
Balance Sheet as at 31 Dec (Extract)96
Current AssetsHP Debtors
Less Provision for unrealized
profit
22501125
1125
Less:Provision for unrealized
profit 1125
HP DebtorsHP Price(b)
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1996 $ 1996 $Jan 1 HP Sales
($2000*2) 4000
Dec 31 Bank-instalment
($250*4*2-250) 1750Dec 31 Bal c/d 2250
4000 40001997 1997
Jan 1 Bal b/d 2250 Dec 31 Bank- instalment 2250
Provision for unrealized profit
1996 $ 1996 $Dec 31 Bal c/d 1125
($4000-2000)*2250/4000
Dec 31 HP Trading 1125
1997 $ 1997 $Dec 31 HP Trading 1125 Dec 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)
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g p y ( )
Sales (HP price)
$ $
96 97
$ $
4000
Less: cost of goods sold 2000
Gross profit
-
Balance Sheet as at 31 Dec (Extract)
$ $
96 97
Current Assets
HP Debtors
Less Provision for unreaslised
profit
22501125
-
-
-
Less:IncreaseProvision forunrealised profit
1125
1125Add: Decrease in prov.for unreasised
profit
875 1125
1125
C. A combination of the 2 methods
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The combination of 2 methods has the
following characteristics:1.The hire purchase sale is recorded at thecash price.
2.The profit is recognized in proportion ofthe amount collected.
3.The gross profit and the interest income
are accounted for separately.4.Interest income is allocated over theperiod of the hire purchase agreement ona suitable basis
Summary of procedures
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Dr HP debtors
Dr HP Sales
With the cash price.
Dr Bank
Cr HP debtor
With the deposit received
Dr Bank
Cr HP debtors
Cr Interest receivable
With the installments received.
With the capital part of the installments.
With the interest receivable for the currentperiod
Dr HP trading
Cr Provision for Unrealizedprofit
With the increase in the provision for
unrealized profit. (Reverse the entries for adecrease in the provision for unrealizedprofit)
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Provision for unrealised profit
= (Cash price Cost ) * Instalments not yet received
Cash Price
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Example 11
Example 11
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Example 11
A company selling on HP has the following details: The interest is accrued evenly throughout the period
of HP agreement
The gross profit on the sales is recognized in theaccounts on the basis of the amounts received
Sales volume 2 units
Date of sale 1 Jan 1996
Cash price $1200
HP price $2000
Cost $1000
Down payment NIL
Instalments $250*8 quarterly
First due 31 Mar 1996
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Interest per instalment
= ($2000-1200)
8= $100
Instalment = Capital + Interest
$250 = $150 + $100
HP Debtors1996 $ 1996 $
CashPrice
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1996 $ 1996 $Jan 1 HP Sales
($1200*2) 2400
Dec 31 Bank-instalment
($250-100)*4*2 1200Dec 31 Bal c/d 1200
4000 4000
HP Interest Receivable
1996 $ 1996 $
Dec 31 P/L 800 Dec 31 Bank ($100*4*2) 800
Provision for unrealized profit
1996 $ 1996 $Dec 31 Bal c/d 200
($2400-2000)*1200/2400
Dec 31 HP Trading 200
Trading and profit and loss account for the year ended (Extract)96
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Sales (cash price)
$ $
96
2400Less: cost of goods sold 2000
200HP profit
Balance Sheet as at 31 Dec (Extract)96
Current AssetsHP Debtors 1200
Less:Provision for unrealised
profit 200
Add: Interest received 800
HP Debtors1996 $ 1996 $
CashPrice
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1996 $ 1996 $Jan 1 HP Sales
($1200*2) 2400
Dec 31 Bank-instalment
($250-100)*4*2 1200
Dec 31 Bal c/d 1200
4000 4000
HP Interest Receivable
1997 $ 1997 $
Dec 31 P/L 800 Dec 31 Bank ($100*4*2) 800
1997 1997
Jan 1 Bal b/d 1200 Dec 31 Bank- instalment 1200
Provision for unrealized profit
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Provision for unrealized profit
1996 $ 1996 $Dec 31 Bal c/d 200
($2400-2000)*1200/2400
Dec 31 HP Trading 200
1997 $ 1997 $Dec 31 Bal b/d 200Dec 31 HP Trading 200
Dec 31 Bal c/d 0($2400-2000)*0/2400
200 200
Trading and profit and loss account for the year ended (Extract)96
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Sales (cash price)
$ $
96 97
$ $
2400
Less: cost of goods sold 2000
Gross profit
-
Balance Sheet as at 31 Dec (Extract)
$ $
96 97
Current Assets
HP Debtors1200 -
Less:IncreaseProvision forunrealised profit
200
200Add: Decrease in prov.for unreasised
profit
200 200
Add: Interest Received 800 800
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Repossession
R i
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Repossession
It may be happen that hire purchasedebtors 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 calledrepossession.
Dr RepossessionCr HP Creditor
With the outstanding balance for theparticular HP debtors
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Interest suspense method
Dr HP interest suspenseCr Repossession
Profit suspense method
Dr Provision for unrealizedprofitCr Repossession
The combined method
Dr RepossessionCr interest Receivable
With the HP interest not yet received
With the outstanding provisiontransferred
With the amount of accrued HP interest
Dr Trading
Cr Repossession
With the value of the repossessed item
which is taken back into stockDr BankCr Repossession
With the insurance claim or any saleproceeds for the repossessed item.
Dr Profit and lossCr Repossession
With the loss on the repossession(Reverse the entries for a profit on
repossession)
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The value of the repossessed item
Cost * Outstanding balance of the particular HP
HP price debtor ( repossessed items)=
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(a) Using interest suspense method
Example 12 (a) A company selling on HP has the following details:
Th i t t i d l th h t th i d
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The interest is accrued evenly throughout the periodof HP agreement
The gross profit on the sales is recognized in the yearof sales
Sales volume 2 units
Date of sale 1 Jan 1996
Cash price $1200
HP price $2000
Cost $1000
Down payment NIL
Instalments $250*8 quarterly First due 31 Mar 1996
All the instalments were received on the due dates,except that payments on one of the items have beendefault since 31 Mar 1997. The repossessed item
has been taken back into stock
HP Debtors1997 $ 1997 $Jan 1 Bal b/d 2000 Mar 31 Repossession 1000
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2000 2000
Jan 1 Bal b/d 2000
Dec 31 Bank- instalment 1000Mar 31 Repossession 1000
HP interest suspense
1997 $ 1997 $
800 800
Dec 31 HP interest 400
received(2000-1200)*4/8*1
Jan 1 Bal b/d 800Mar 31 Repossession 400
Repossession
1997 $ 1997 $
Mar 31 HP Debtors 1000 Mar 31 HP int. suspense 400($800-$400)Dec 31 HP Trading 500
($1000*1000/2000)
Value of
Repossessed items
Dec 31 P/L-loss on repossession 100
1000 1000
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(b) Using profit suspense method
Example 12(b) A company selling on HP has the following details:
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A company selling on HP has the following details:
The gross profit on the sales is recognized on thebasis of the cash received
Sales volume 2 units
Date of sale 1 Jan 1996
Cash price $1200
HP price $2000
Cost $1000
Down payment NIL
Instalments $250*8 quarterly
First due 31 Mar 1996
All instalments were received on the due dates,except that payments on one of the items have beenin default since 31 Mar 1997. The repossessed itemhas been taken back into stock.
HP Debtors1997 $ 1997 $
Jan 1 Bal b/d 2000 Mar 31 Repossession 1000
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Jan 1 Bal b/d 2000
Dec 31 Bank- instalment 1000
Mar 31 Repossession 1000
Repossession
1997 $ 1997 $
Mar 31 HP Debtors 1000 Mar 31 Prov. for unrealised 500
profit(2000-1000)*1000/2000
Dec 31 HP Trading 500
($1000*1000/2000)1000 1000
Provision for unrealisedprofit
1997 $ 1997 $
800 800
Dec 31 HP Trading 500
Jan 1 Bal b/d 1000Mar 31 Repossession 500
Value of
Repossessed items
Dec 31 Bal c/d 0(2000-1000)*0/2000
2000 2000
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(c) Using the combined method
Example 12(c)
A company selling on HP has the following details:
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A company selling on HP has the following details:
The interest is accrued evenly throughout the period
of HP agreement The gross profit on the sales is recognized in the
accounts on the basis of the amounts received
Sales volume 2 units
Date of sale 1 Jan 1996
Cash price $1200
HP price $2000
Cost $1000
Down payment NIL
Instalments $250*8 quarterly
First due 31 Mar 1996
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All the instalments were received on the due dates,except that payments on one of the item has beenin default since 31 Mar 1997
1. The seller repossessed the goods on the same
date (31 Mar 1997)as that the HP debtor defaultedon the payment
2. The seller repossessed the goods on 31 June1997, after the HP debtor defaulted on the payment
(1)HP Debtors
1997 $ 1997 $Jan 1 Bal b/d 1200 Mar 31 Repossession 600
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1200 1200
Dec 31 Bank- instalment 600
($250-100)*4
Mar 31 Repossession 600
Interest receivable
1997 $ 1997 $Dec 31 Bank ($100*4) 400Dec 31 P/L 400
Repossession
1997 $ 1997 $
Mar 31 HP Debtors 600$1200-(250-100)*4 Dec 31 HP Trading 500($1000*1000/1200)
Value of
Repossessed items
Dec 31 P/L-loss on repossession 100
600 600
(2) 1997 $ 1997 $Jan 1 Bal b/d 1200 June30 Repossession 600
HP Debtors
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1200 1200
Dec 31 Bank- instalment 600
($250-100)*4
June30 Repossession 600
Interest receivable
1997 $ 1997 $
Dec 31 Bank ($100*4) 400
Dec 31 P/L 600
Repossession
1997 $ 1997 $June 30 HP Debtors 600$1200-(250-100)*4
Dec 31 HP Trading 500
($1000*1000/1200)
Value of
Repossessed items
Dec 31 P/L-loss on repossession 300
600 600
June 30 Repossession 200
($100*2)
June 30 Interest 200
receivable
600 600
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Hire Purchase Trading andProfit and loss account
Interest suspense method and thecombined method
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x
x
x
x
x
xx
Hire Purchase Trading$ $
Purchase
Add Repossession
Less closing stock
Cost of Goods sold
Gross profit
Salescash price x
x
combined method
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xx
Profit and Loss (Extract)$ $
Loss on RepossessionHP interestProfit on Repossession
HP profitx
x
Profit suspense method
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x
x
xx
x
xx
Hire Purchase Trading$ $
Purchase
Add Repossession
Less closing stock
Cost of Goods sold
Gross profit
SalesHP price x
x
Provision for Unrealized profit x
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xx
Profit and Loss (Extract)$ $
Loss on RepossessionProfit on RepossessionHP profit
x
ABC Ltd. Purchased a vehicle from Grace ltd. On Jan 1996
on hire purchase agreement. The details were as follows:
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Cash price $9,000
HP price $11,096
Down payment $1,000
Instalment 4 equal annual instalments
First due 31 December 1996
Interest 10% on outstanding balance
Depreciation 10% on cost
U i ( ) h i h d