hire purchase and installment system
Table of content
- what is hire purchase system.
- characteristics of hire purchase system
- terms used in hire purchase agreement.
- installment. payment system
- Question and answers
1.what is hire purchase system?
hire purchase system: it is a special system of purchase and sale .when goods are purchased on hire-purchase system, hire purchase and installment system the purchaser pays the price in installment. these instalment may be monthly , quarterly or yearly .goods are delivered to the purchaser immediately but the purchaser becomes the owner of the goods only the payment of the last. installment. each instalment paid is treated is hire charge till the payment of the last installment when the ownership in the goods passes from the seller to the buyer .if there is any default in the payment of even the last instalment , the seller has the right to take back the possession of the goods and forfeit the amount already received treating it as a hire charge .the purchaser is called the “ hire purchaser : and the seller is called hire vendor”
2.characteristics of hire purchase system:
- possession of the goods is delivered by the seller to the buyer.
- the buyer agrees to pay hire purchase price (I:”e .. cash price + interest) in installment .
- installment paid is treated as a hire charge till the payment of the last installment.
- after the payments of the last installment , ownership is transferred to the buyer.
- in cash of default in the payment by the buyer, the seller has a right to repossess the goods, as ownership lies with the seller , till the payment of the last installment .transaction with above mentioned features are called hire purchase transaction because of hire cum purchase nature of these transaction.
3.terms used in hire purchase agreement:
- hire purchaser: he is buyer in a hire purchase agreement.
- hire vendor: he is seller in a hire purchase agreement.
- cash price: it is the amount to be paid for outright purchaser in cash
- down payment: it is the amount of initial payment payable by the hire purchaser at the time of entering into a hire purchaser agreement.
- hire purchaser price: it is the total amount payable by the hire purchaser to the hire vendor of the goods purchased under the hire purchaser system.
4.installment payment system:
it is a system of credit sale in which price is paid in installment over a period of time. under this system , the buyer gets the possession and also the ownership of the goods right at the time of signing the agreement. if the buyer makes default in the payment of any installment, the seller cannot repossess the goods , but he can sue the buyer for the amount. due
distinction between hire purchase system and installment payment system
| Basis of distinction | Hire purchase system | Instalment payment system |
| (1) Nature of contract | It is an agreement of hiring | It is contract of sale. |
| (2) Transfer of ownership | Ownership in the goods passes to the buyer after the payment of the last instalment. | Ownership in the goods passes immediately (i:” e at the time of signing the contract) |
| (3) Right of the seller | If the buyer fails to pay any instalment , the goods can be repossess by the seller . | The seller cannot repossess the goods .he can sue the buyer for the amount. due |
| (4) Right of disposal | The buyer cannot hire out, sell , transfer, or pledge the goods | The buyer can hire out sell, transfer or pledge the goods. |
| (5) Return of goods | The buyer may return the goods without further payment , except for accrued instalments. | Except for seller” s default goods cannot be returned. |
5.Question and Answer
Question:1 x transport ltd .purchase from manish motors 3 tempos costing A/c 400,000 each one hire -purchase basic on 1-1-2005.25%of the cost was to be paid down and the balance in 3equal annual instalments together with interest @9%at the end of each year .x transport ltd paid the instalment due on 31st December , 2005,but could not pay thereafter .manish motors agreed to leave one tempo with the purchaser on 1-1-2007 adjusting the value of the other 2 tempos against the amount due on that date. the tempos recovered were valued on the basis of 30% depreciation annually on.W. D.V x transport ltd. charge depreciation on tempos @20% on diminishing balance method. manish motors incur a/m 40,000 on repair of tempos repossessed and resell them at a profit of 5% on total cost .write up necessary ledger accounts in the books of both parties giving effect to the above transaction,
Answer: in the books of x transport
tempos account
| date | particulars | Amount | date | particulars | Amount |
| 1.1.05 | To manish motors A/c (400,000*3) | 1200,000 | 31.12.05 31.12.05 | By depreciation A/c (12,00,000*20/100) By balance C/d | 240,000 9.60,000 |
| Total | 1200,000 | Total | 1200,000 | ||
| 1.1.06 | To balance b/d | 960,000 | 31.12.26 | By depreciation a/c (960,000*20/100) | 1920,00 |
| 31.12.06 | By manish motors A/c (value of 2 tempos take away) | 392,000 | |||
| 31.12.06 | By profit & loss A/c (loss note3) | 120,000 | |||
| 31.12.06 | By balance c/d (value of one tempo left)(note1) | 256,000 | |||
| Total | 960,000 | Total | 960,000 |
manish motors account
| date | particulars | Amount | date | particulars | Amount |
| 01.01.05 | To bank A/c (down payment) | 300,000 | 1.1.05 | By asset (tempos) A\c | 1200,000 |
| 31.12.05 | To bank A/c (300,000+81000) | 381,000 | 31.12.05 | By interest A/c (900,000*9/100) | 81,000 |
| 31.12.05 | By balance c/d | 600,0000 | |||
| Total | 12,81,000 | Total | 12,81,000 | ||
| 31.12.06 | To tempos A/c (value of 2 tempos taken away) | 392,000 | 1.1.06 | By balance b/d | 600,000 |
| 31.12.06 | To balance c/d | 2,62,000 | By interest A/c (600,000*9/100) | 54,000 | |
| Total | 6,54,000 | Total | 6,54,000 |
in the books of manish motors (vendor)
x transport ltd. account
| date | particulars | Amount | date | particulars | Amount |
| 1.1.05 31.12.05 | To hire sales A/c To interest A/c | 1200,000 81,000 | 1.1.05 | By bank A/c ( down payment) | 300,000 |
| 31.12.05 31.12.05 | By bank A/c By balance c/d | 3,81,000 600,000 | |||
| Total | 12,81,000 | Total | 12,81,000 | ||
| 01.01.06 31.12.06 | To balance b/d To interest A/c | 600,000 54,000 | 31.12.06 31.12.06 | By goods repossessed A/c By balance c/d | 3,92,000 2,62,000 |
| Total | 6,54,000 | Total | 6,54,000 |
goods repossessed account
| particulars | Amount | particulars | Amount |
| To x transport ltd, To bank A/c ( repairs) To profit & loss A/c (profit on sale) (392,000+40,000)*5/100 | 3,92000 40,000 21,600 | By bank A/c ( sales) | 4,53,600 |
| 4,53,600 | 4,53,600 |
Working note:
| (1) value of tempo left with the buyer number of tempos one cash price:(400000*1) 400,0000 less: depreciation @20% p.a on diminishing balance method for one year (first year 2005) 80,0000 value of tempo left with the buyer 3,20,000 at the end of the first year less: depreciation @20% p.a (for 2006) 6,400 value of tempo left with the buyer at the end of 2nd year 2,56,000 (2) value of tempo taken away by the seller number of tempos: two cash price (cost)(400,000*2) 800,000 depreciation 30% as per w.d.v. method for 2year :;;, (2,40,000+168,000=408,000 4,08000 value of tempos taken away at the end of the 2nd year 3,92,000 (3) book value of two tempos on 31.12.06 = 800,000-(160,000-depreciation for the first year)- (1,28,000-depreciation as per w.d.v, 2nd year) = 5,12,000 value of tempos taken (as per note2)= 3,92,000 loss due to default (5,12,000-3,92.000) = 1,20,000 |
Question:2 angel cabs purchased 3 cars costing a/m 500,000 each from freedom motors on 1st april, 2012on hire purchase basis .the terms of delivery were as follow
- 20% of the cash price to be paid on signing the argreement
- balance in three annual instalments plus interest
- interest is charged on outstanding balance @20% as per diminishing balance method
angel cabs could not pay the final instalment freedom motors repossessed 2 cars on 31st march ,2015 by charging depreciation @30% as per diminishing balance method . additionally , they spent 40,000 on repairs and sold the 2 cars for a total price of 400,000 . assume that their books are closed on 31st march every years, show cars account and freedom motors account in the books of angel cab and angel cabs ” account and goods repossessed account in the books of freedom motors;
Answer: calculation of interest
| date | particular | Interest | Instalment |
| 1st April, 2012 | 15,00,000 (500.000*3) | 3,00,000 ( down payment) | |
| 31st march, 2013 | 4,00,000 | 12,00,000*10/100=120,000 | 5,20,000 (1) |
| 31st march,2014 | 400,000 | 800,000*10/100=80,000 | 4,80,000 (2) |
| 31st march,2015 | 400,000 | 4,00,000*10/100=40,000 | 4,40,000 (3) |
value of 2 cars repossessed
| cash price:500,000*2 | 10,00,000 |
| less: depreciation @ 30% w.d.v (year1) | 300,000 |
| balance as on 31/3/13 | 700,000 |
| less: depreciation @ 30% w.d.v (year2) | 210,000 |
| balance as on 31/3/14 | 4,90,000 |
| less: depreciation @30% w.d.v (year3) | 1,47,000 |
| balance as on 31/3/15 | 3,43,000 |
| loss on repossession | |
| as on 31st march,2015-(2,56,000*2) | 5,12,000 |
| less: value as per hire vendor | 3,43,000 |
| 1,69,000 | |
| value of 1 car left with angel cabs | |
| cash price | 500,000 |
| less: depreciation @20% on w.d.v | 100,000 |
| balance as on 31/3/13 | 400,000 |
| less: depreciation @20% on w.d.v | 80,000 |
| balance as on 31/3/14 | 320,000 |
| less: depreciation @ 20% on w.dv | 64,000 |
| balance as on 31/3/15 | 2,56,000 |
in the books of angel cabs
cars A/c
| date | particular | Amount | date | particular | Amount |
| 2012,April, 1 | To freedom motors A/C | 15,00,000 | 2013 March 31 March 31 | By depreciation A/c By balance c/d | 3,00,000 120,0000 |
| 15,00,000 | 15,00,000 | ||||
| 2013 april 1 | To balance b/d | 12,00,000 | 2014 March 31 | By depreciation A/c By balance c/d | 2,40,000 9,60,000 |
| 12,00,000 | 12,00,000 | ||||
| 2014 april 1 | To balance b/d | 960,000 | 2015 March 31 | By depreciation A/c By freedom motors A/c By profit &loss A/c (loss on repossession) By balance c/d | 1,92,000 3,43,000 1,69,000 2,56,000 |
| 9,60,000 | 9,60,000 |
freedom motors A/c
| date | particular | Amount | date | particular | Amount |
| 2012 april 1 2013 march 31 March 31 | To bank a/c (down payment) To bank A/c (1) To balance c/d | 300,000 5,20,000 8,00,000 | 2012 paril,1 2013 march 31 | By cars A/c By interest | 15,00,000 1,20,000 |
| 16,20,000 | 16,20,000 | ||||
| 2014 March 31 March 31 | To bank A/c (2) To balance c/d | 4,80,000 4,00,000 | 2013 April 1 March 31 | By balance b/d By interest A/c | 8,00,000 80,000 |
| 8,80,000 | 8,80,000 | ||||
| 2015 March 31 March31 | To cars A/c To balance c/d | 3,43,000 97,000 | 2014 April 1 | By balance b/d By interest A/c | 4,00,000 40,000 |
| 4,40,000 | 4,40,000 |
in the books of freedom motors
angel cabs A/c
| date | particular | Amount | date | particular | Amount |
| 2012 April 1 2013 march 31 | To HP sales A/c To interest A/c | 15,00,000 120,000 | 2012 April 1 2013 march 31 | By bank A/c By bank A/c By balance c/d | 3,00,000 5,20,000 8,00,000 |
| 16,20,000 | 16,20,000 | ||||
| 2013 april 1 2014 march 31 | To balance b/d To interest A/c | 80,0000 80,000 | 2014 march 31 | By bank A/c By balance c/d | 4,80,000 4,00,000 |
| 8,80,000 | 8,80,000 | ||||
| 2014 april 1 2015 march 31 | To balance b/d To interest A/c | 4,00,000 40,000 | 2015 march 31 | By goods rep A/c By balance c/d | 3,43,000 97,000 |
| 440,000 | 440,000 |
goods repossessed A/c
| particular | Amount | particular | Amount |
| To angel cabs A/c To cash A/c (repair) To profit & loss A/c | 3,43,000 40,000 17,000 | By cash A/c | 400,000 |
| 400,000 | 400,000 |