Ch.7 Hire Purchase Instalment System
Ch.7 Hire Purchase Instalment System
Ch.7 Hire Purchase Instalment System
CHAPTER – 7
HIRE PURCHASE & INSTALMENT SYSTEM
TABLE OF CONTENTS
1. Distinction between HP & Installment 2. Hire Purchase System
3. Installment System 4. Presentation of Asset A/c in BS of Purchaser
5. Acc. Entries For Hire Purchase Transaction 6. Repossession of Goods under HP System
7. Practical Problems
POINT OF
HIRE PURCHASE SYSTEM INSTALLMENT SYSTEM
DIFFERENCE
It is governed by Hire Purchase Act, 1972. Governing Act It is governed by Sale of Goods Act, 1930.
Nature of
It is an agreement of hiring. It is an agreement of sale.
Contract
The parties involved are called Hirer and The parties involved are called buyer and
Parties Involved
Hire vendor. seller
Ownership is transferred on payment of last Transfer of Ownership is transferred on date of
installment. Ownership delivery, like normal sale.
Right of The seller can sue for price if the buyer is
The seller may take possession of the goods
Repossession by in default. He cannot take possession of
if hirer is in default.
Seller the goods.
Hirer cannot hire out sell, pledge or assign
The buyer may dispose off the goods and
entitling transferee to retain possession as Right of Disposal
give good title to the bona fide purchaser.
against the hire vendor.
The hirer is not responsible for risk of loss
The buyer is responsible for risk of loss of
of goods if he has taken reasonable Responsibility
goods because of the ownership has
precaution because the ownership has not for Risk of Loss
transferred.
yet transferred.
Component other than Cash Price included Component Component other than Cash Price included
in installment is called Hire charges. other than Cash in Installment is called Interest.
MEANING:
Under the Hire Purchase System, the Hire Purchaser gets possession of the goods at the outset and can use it,
while paying for it in instalments over a specified period of time as per the agreement. However, the ownership
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of the goods remains with the Hire Vendor until the hire purchaser has paid all the instalments. Each instalment
paid by the hire purchaser is treated as hire charges for using the asset. In case he fails to pay any of the
instalments (even the last one) the hire vendor has the right to take back his goods without compensating the
SPECIAL TERMS:
i) Cash Price: A price by which goods are purchased or sold in the market on cash terms. This price is also
known as ‘Cash down Price.’
ii) Hire purchase price: A price payable by the buyer to seller under H.P. agreement.
iii) Instalment price: A price payable by the buyer to the seller under Instalment agreement.
iv) Cash down: A sum payable as initial payment towards hire purchase/Instalment price by the buyer to the
seller on signing of the agreement.
v) Loading: A difference between hire purchase price and cost price. Loading is not accounted for.
vi) Interest: A compensatory payment by a buyer to a seller for delay in payments.
vii) Profit: Margin of the seller added to the cost price to arrive at selling price
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Loading
Instalment 4
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Under the hire purchase system, the hire vendor has a right of repossession of goods, on failure to receive the
Instalment on due date. This may be dealt with the following four categories:
i. No clause for valuation of repossessed goods
a) Full repossession
b) Part repossession
goods is determined and the entry for repossession is made with that value. The balance in vendor’s A/c. after
adjustment of repossession value, represents amount receivable from or payable to vendor in settlement of
7. PRACTICAL PROBLEMS
Q1. Calculation of Cash Price and Hire Purchase Price REG. PAGE NO.
Asha purchased a truck on hire purchase system. As per terms she is required to pay Rs. 70,000 down, Rs.
53,000 at the end of first year, Rs. 49,000 at the end of second year and Rs. 55,000 at the end of third year.
Interest is charged @ 10% p.a. You are required to calculate the total cash price of the truck and the interest
paid with each instalment.
Q2. Calculation of Cash Price and Hire Purchase Price REG. PAGE NO.
A acquired on 1st January, 2020 a machine under a Hire-Purchase agreement which provides for 5 half-
yearly instalments of Rs. 6,000 each, the first instalment being due on 1st July, 2020. Assuming that the
applicable rate of interest is 10 per cent per annum, calculate the cash value of the machine. All working
should form part of the answer.
Q3. Calculation of Cash Price and Hire Purchase Price REG. PAGE NO.
On 1st April, 2020 a manufacturing company buys on Hire-purchase system a machinery for Rs. 90,000,
payable by three equal annual instalments combining principal and interest, the rate of interest was 5%
per annum. Calculate the amount of cash price and interest. Assume that the present value of an annuity of
one rupee for three years at 5% interest is Rs. 2.723.
Q4. Calculation of Cash Price and Hire Purchase Price REG. PAGE NO.
Om Ltd. purchased a machine on hire purchase basis from Kumar Machinery Co. Ltd. on the following
terms:
(a) Cash price Rs. 80,000
(b) Down payment at the time of signing the agreement on 1.1.2020 Rs. 21,622.
(c) 5 annual instalments of Rs. 15,400, the first to commence at the end of twelve months from the date
of down payment.
(d) Rate of interest is 10% p.a.
You are required to calculate the total interest and interest included in cash instalment.
Q5. Calculation of Cash Price and Hire Purchase Price REG. PAGE NO.
On 1st April, 2019 Fastrack Motors Co. sells a truck on hire purchase basis to Teja Transport Co. for a total
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hire purchase price of Rs. 9,00,000 payable as to Rs. 2,40,000 as down payment and the balance in three
equal annual installments of Rs. 2,20,000 each payable on 31st March, 2020, 2021 and 2022. The hire
vendor charges interest @ 10% per annum.
Q6. Calculation of Cash Price and Hire Purchase Price REG. PAGE NO.
Happy Valley Florists Ltd. acquired a delivery van on hire purchase on 01.04.2018 from Ganesh
Enterprises. The terms were as follows:
Particulars Amount (Rs.)
Hire Purchase Price 180,000
Down Payment 30,000
1st installment payable after 1 year 50,000
2nd installment after 2 years 50,000
3rd installment after 3 years 30,000
4th installment after 4 years 20,000
Cash price of van Rs.1,50,000. You are required to calculate Total Interest and Interest included in each
instalment.
Q7. Accounting for Hire Purchase Transactions: Cash Price Method REG. PAGE NO.
On January 1, 2018 HP M/s acquired a Pick-up Van on hire purchase from FM M/s. The terms of the contract
were as follows:
(a) The cash price of the van was Rs. 1,00,000.
(b) Rs. 40,000 were to be paid on signing of the contract.
(c) The balance was to be paid in annual instalments of Rs. 20,000 plus interest.
(d) Interest chargeable on the outstanding balance was 6% p.a.
(e) Depreciation at 10% p.a. is to be written-off using the straight-line method.
You are required to:
(a) Give Journal Entries and show the relevant accounts in the books of HP M/s from January 1, 2018 to
December 31, 2020; and
(b) Show the relevant items in the Balance Sheet of the purchaser as on December 31, 2018 to 2020.
Q8. Accounting for Hire Purchase Transactions: Interest Suspense Method REG. PAGE NO.
On January 1, 2018 HP M/s acquired a Pick-up Van on hire purchase from FM M/s. The terms of the contract
were as follows:
(a) The cash price of the van was Rs. 1,00,000.
(b) Rs. 40,000 were to be paid on signing of the contract.
(c) The balance was to be paid in annual instalments of Rs. 20,000 plus interest.
(d) Interest chargeable on the outstanding balance was 6% p.a.
(e) Depreciation at 10% p.a. is to be written-off using the straight-line method.
On this basis, prepare H.P. Interest Suspense Account, Interest Account and FM M/s Accounts and Balance
Sheets in the books of hire purchaser.
provides depreciation on the machinery @ 10% per annum on WDV Basis. All workings should from part
of your answer.
Q1. Calculation of Cash Price and Hire Purchase Price (ICAI SM Q1/11.41) REG. PAGE NO.
‘A’ acquired on 1st January, 2020 a machine under a Hire-Purchase agreement which provides for 5 half-
yearly instalments of Rs. 6,000 each, the first instalment being due on 1st July, 2020. Assuming that the
applicable rate of interest is 10 per cent per annum, calculate the cash value of the machine. All working
should form part of the answer.
ANSWER: Cash Price = Rs. 25,977 and Total Interest Rs. 4,023.
Q2. Accounting for Hire Purchase Transactions as if it is normal sales REG. PAGE NO.
S.T. Collieries purchases wagon from K. Wagon Co. on the Instalment system on 1st April, 2009 payment
being made Rs. 6,000 down and Rs. 6,000 annually for 3 years. The cash price is Rs. 22,340. The rate of
interest is 5%. Depreciation is written off at the rate of 10% on the diminishing value. Give journal entries
in the books of both the parties. Also show the various items in the Balance Sheet of S.T. Collieries.
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