Hire Purchase Accounts

Hire Purchase
Hire Purchase (HP) is one of the
payment methods of which the buyer
use the goods without immediate full
settlement of the price of the goods
With Hire Purchase Agreement
The HP selling price includes normal
Cash Price PLUS HP Interest
The seller agreed that the buyer could
hire the goods by payments of deposit
and instalments


Hire Purchase Price

= Cash Price + Total Hire Purchase Interest
OR
=
Deposit
(Down payment)
+
Outstanding Balance
(including HP interest
paid by instalments
Calculation of Hire Purchase
Interest
(a) Straight line method
(b) Actuarial Method
(c) Sum-of-digits Method
Straight Line Method(Equal apportionment)
Interest is apportioned evenly over the
number of installments agreed upon.

HP Interest per instalment
= Total HP Interest
Number of total instalments
Example 1
An asset is acquired on the following
terms:
Cash price $9000
Down payment $1000
HP Price $12200
Nominal rate of interest 10%
Four annual instalments $2800
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
$ $ $
1
2
3
4
800
800
800
800
2800
2800
2800
2800
2000
2000
2000
2000
+ =
Answer:
B. Actuarial Method
Interest is charged on the outstanding
balance of the cash price after the down
payment is made.
1. Equal instalments
2. Unequal instalment

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 price Down payment
No. of instalment
(11096-1000)/4
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
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)
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
2600
2400
2200
C. Sum of Digits Method
The HP interest is apportioned according
to the digit assigned (descending order)
Using this method, more interest is
charged in the earlier periods, less
interest is charged in the later periods.
HP interest per instalment
= Total HP interest* Digit assigned in the instalment
Sum-of-digits of total instalment
When n = number of instalments
Sum of digits = n(n+1)
2
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 the
date of sale
(b) First instalment due at the beginning of month
following the date of sale
(c) First instalment due at the date of sale.

Case (a) and (b)
Interest paid
1
st
instalment $3600*4/10=$1440
2
nd
instalment $3600*3/10=$1080
3
rd
instalment $3600*2/10=$720
4
th
instalment $3600*1/10=$360
Total HP interest =$13600-$10000=$3600
Sum of digit= 4*(4+1)/2=10
Case ( C )
Interest paid
1
st
instalment $3600*3/6=$1800
2
nd
instalment $3600*2/6=$1200
3
rd
instalment $3600*1/6=$600
4
th
instalment -
Total HP interest =$13600-$10000=$3600
Sum of digit= 3*(3+1)/2=6
Concept Chart
Hire Purchase
Buyer Seller
Assets
account
Hire purchase
interest account
Hire purchase
creditors account
Hire purchase
interest suspense
account
Hire purchase
sales
Provision
for unrealized
profit
Hire purchase
debtors account
Purchasers Books
Acquisition of Assets on Hire Purchase
When an asset is acquired on hire
purchase, there are 2 ways to account for
this in the purchasers books.
1. Progress interest charge system
2. Interest Suspense Method
They differ mainly in the way they record
hire purchase interest.
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
Progress interest charge system
Interest is charged upon each instalment.
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:
Notes :
Cut off of the financial period should be aware in order to
calculate the total hire purchase interest of the financial period
to be reflected in the P/L account as an expense item
Each financial year may include up to 12 monthly instalment,
4 quarterly instalment or 2 half-yearly instalment


Balance Sheet Presentation
For instance: after 1
st
instalment Paid
Progress interest charge system:

Balance Sheet ( Instalment for 1
st
year)
Current Liabilities
HP Creditor (Instalment for 2
nd
year)
$
X
Long term Liabilities
HP Creditor (Instalment for 3
rd
year and so on)
X
Instalment for 2
nd
year Interest payable for 2
nd
year
Outstanding HP creditor HP creditor on current liabilities
For instance: after 1
st
instalment Paid
Interest Suspense Method:
Balance Sheet ( Instalment for 1
st
year)
Current Liabilities
HP Creditor (Instalment for 2
nd
year)
$
X
Long term Liabilities
HP Creditor (Instalment for 3
rd
year and so on)
X
Less HP interest suspense (X)
Less HP interest suspense (X)
X
X
Outstanding HP creditor Instalment for next year
Outstanding interest suspense interest
Payable for 2
nd
year
Interest payable for 2
nd
year
Example
Refer to textbook P.24
Example 6
ABC Ltd. purchased a vehicle from Grace Ltd. on 1
Jan 1996 on HP agreement. The details were as
follows
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.
Total HP interest= HP price Cash Price
= 11096 9000
= 2096
Equal instalments = (11096 1000)/4
=2524
Answer (a):
Hire purchase Creditor (Grace Ltd)
1/1/96 Vehicle 9,000 1/1/96 Bank-deposit 1,000
31/12 HP Interest 800
(9000-1000)*10%
31/12 Bank-instalment 2,524
31/12 Balance c/d 6,276
9,800
9,800
Hire Purchase Interest
31/12/96 HP Creditor 800 31/12/96 P/L 800
Balance Sheet as at 31 Dec (Extract)
Fixed Assets
96
Vehicle
Less Pro for Dep


Current Liabilities
HP Creditor
9000
900
8100
1896
2524-628
Long Term Liabilities
HP Creditor
4380
6276-1896
Hire purchase Creditor (Grace Ltd)
1/1/96 Vehicle 9,000 1/1/96 Bank-deposit 1,000
31/12 HP Interest 800
31/12 Bank-instalment 2,524
31/12 Balance c/d 6,276
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
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)
1/1/96 Vehicle 9,000

1/1/96 Bank-deposit 1,000
31/12 HP Interest 800
31/12 Bank-instalment 2,524
31/12 Balance c/d 6,276
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 4,380
31/12 HP interest(4380*10%) 438
31/12 Bank-instalment 2,524
31/12 Balance 2,294
4,818
4,818
Hire Purchase Interest
31/12/98 HP Creditor 438 31/12/98 P/L 438
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)
1/1/96 Vehicle 9,000 1/1/96 Bank-deposit 1,000
31/12 HP Interest 800 31/12 Bank-instalment 2,524
31/12 Balance c/d 6,276
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 4,380
31/12 HP interest(4380*10%) 438
31/12 Bank-instalment 2,524
31/12 Balance 2,294
4,818 4,818
1/1/99 Balance b/d 2294
31/12 HP interest(2294*10%) 230
31/12 Bank-instalment 2,524
2524 2524
Hire Purchase Interest
31/12/99 HP Creditor 230 31/12/99 P/L 230
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
- -
Interest is recorded all together at the
beginning of hire purchase agreement
and charge proportionally to the profit
and loss account every year.
Interest Suspense Method
Dr Fixed assets
Dr HP Interest Suspense
Cr HP Creditor
With the cash price of assets
With total hire purchase interest
With 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 accrued
for the current year (at the year end)
Dr Profit and Loss
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 based
on full cash price of the asset.
Interest Suspense Method:
Example
Refer to textbook P.24
Example 6
ABC Ltd. purchased a vehicle from Grace Ltd. on 1
Jan 1996 on HP agreement. The details were as
follows
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.
Answer (b):
Total HP interest= HP price Cash Price
= 11096 9000
= 2096
Equal instalments = (11096 1000)/4
=2524
Hire purchase Creditor (Grace Ltd)
1/1/96 Vehicle 9,000 1/1/96 Bank-deposit 1,000
31/12 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 Suspense
31/12/96 HP Interest 800
(9000-1000)*10%
1/1/96 HP Creditor 2096
31/12/96 Bal c/d 1296
2096 2096
Current Liabilities
HP Creditor

Balance Sheet as at 31 Dec (Extract)
96
Long Term Liabilities
HP Creditor
Less HP interest suspense
2524
628
1896
Less HP interest suspense
5048
668
4380
7572-2524
(7572-1296)*10%
1296-628
Hire purchase Creditor (Grace Ltd)
1/1/96 Vehicle 9,000 1/1/96 Bank-deposit 1,000
31/12 Bank-instalment 2,524
31/12 Balance c/d 7572
9,800 9,800
1/1/97 Balance b/d 7572 31/12 Bank-instalment 2,524
6,904
31/12 Balance c/d 5048
6,904
1/1/96 HP Interest Suspense 2096
HP Interest Suspense
31/12/96 HP Interest 800
(9000-1000)*10%
1/1/96 HP Creditor 2096
31/12/96 Bal c/d 1296
2096 2096
31/12/97 HP Interest 628
(7572-1296)*10%
1/1/97 Bal b/d 1296
2096 2096
31/12/97 Bal c/d 668
Hire Purchase Interest
31/12/97 HP Creditor 628 31/12/98 P/L 628
Current Liabilities
HP Creditor

Balance Sheet as at 31 Dec (Extract)
96 97
Long Term Liabilities
HP Creditor
Less HP interest suspense
2524
628
2524
438
1896
2086
Less HP interest suspense
5048
2524
668 230
4380 2294
5048-2524
(5048-668)*10%
668-438
Hire purchase Creditor (Grace Ltd)
1/1/96 Vehicle 9,000 1/1/96 Bank-deposit 1,000
31/12 Bank-instalment 2,524
31/12 Balance c/d 7572
9,800 9,800
1/1/97 Balance b/d 7572 31/12 Bank-instalment 2,524
6,904
31/12 Balance c/d 5048
6,904
1/1/98 Balance b/d 5048 31/12 Bank-instalment 2,524
31/12 Balance c/d 2524
4,818 4,818
1/1/96 HP Interest Suspense 2096
HP Interest Suspense
31/12/96 HP Interest 800
(9000-1000)*10%
1/1/96 HP Creditor 2096
31/12/96 Bal c/d 1296
2096 2096
31/12/97 HP Interest 628
(7572-1296)*10%
1/1/97 Bal b/d 1296
2096 2096
31/12/97 Bal c/d 668
31/12/98 HP Interest 438
(5048-668)*10%
1/1/98 Bal b/d 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
Current Liabilities
HP Creditor

Balance Sheet as at 31 Dec (Extract)
96 97 98
Long Term Liabilities
HP Creditor
Less HP interest suspense
2524
628
2524
2524
438
230
1896
2294 2086
Less HP interest suspense
5048
2524
668 230
-
-
4380 2294
-
2524-2524
(2524-230)*10%
230-230
Hire purchase Creditor (Grace Ltd)
1/1/96 Vehicle 9,000 1/1/96 Bank-deposit 1,000
31/12 Bank-instalment 2,524
31/12 Balance c/d 7572
9,800 9,800
1/1/97 Balance b/d 7572 31/12 Bank-instalment 2,524
6,904
31/12 Balance c/d 5048
6,904
1/1/98 Balance b/d 5048 31/12 Bank-instalment 2,524
31/12 Balance c/d 2524
4,818 4,818
1/1/99 Balance b/d 2524 31/12 Bank-instalment 2,524
2524 2524
1/1/96 HP Interest Suspense 2096
HP Interest Suspense
31/12/96 HP Interest 800
(9000-1000)*10%
1/1/96 HP Creditor 2096
31/12/96 Bal c/d 1296
2096 2096
31/12/97 HP Interest 628
(7572-1296)*10%
1/1/97 Bal b/d 1296
2096 2096
31/12/97 Bal c/d 668
31/12/98 HP Interest 438
(5048-668)*10%
1/1/98 Bal b/d 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
Current Liabilities
HP Creditor

Balance Sheet as at 31 Dec (Extract)
96 97 98 99
Long Term Liabilities
HP Creditor
Less HP interest suspense
2524
628
2524
2524
-
438
230
-
1896
2294 2086
-
Less HP interest suspense
5048
2524
668 230
-
-
-
-
4380 2294
-
-
B. Termination of a Hire Purchase
Agreement
The buyer can terminate the hire purchase
agreement earlier by paying balance earlier
than the last installment date.
However, the buyer may also be forced to
terminate the agreement earlier if the asset is
scrapped due to its use.
Upon the termination of a hire purchase
agreement, a number of entries should be
made in the books.
The accounting treatments differ, depending
on which method is used to record hire
purchase interest.
1. Progress interest charge system
Summary of procedures
Dr HP creditor
Cr Bank
With the last payment to the HP
creditor
Dr HP interest
Cr HP creditor
With the HP interest and penalty
charges for early termination of the
hire purchase contract
Dr Disposal
Cr Asset
With the cost of the asset
Dr Provision for depreciation
Cr Disposal
Transferring related depreciation
provision to the disposal account
Dr Bank
Cr Disposal
With the insurance claim for the
disposal (if any)
Dr Profit and Loss
Cr Disposal
With the loss on the disposal
(Reverse the entries for a profit on
disposal)
Example 7
Example 7
Cash Price $5000
Prov for dep $3200
( A full year dep is charged in the year of purchase, but none
in the year of disposal)
HP creditor on 1 Jan 1996 $1800
Instalments $250(monthly)
Interest $50
The car was involved in an accident in May 1996
resulting in a total write off, and the sum of $1000
was received from the insurnance company.
All instalments up to and including 31 May were
paid.
A payment of $930 was made on 30 June 1996 in
full settlement
HP Creditor
1996 $ 1996 $
May 31 Bank instalment 1250
($250*5)
Jan 1 Bal b/f 1800
Dec 31 HP interest 300
($50*6)
June30 Bank-settlement 930
Dec 31 HP interest
-penalty 80
2180 2180
HP interest
1996 $ 1996 $
Dec 31 HP Creditor
(300+80) 380
Dec 31 P/L 380
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 3200 Jun 30 Disposal 3200
Jun 30 Dep 3200
Jun 30 Bank
- insurance 1000
Dec 31 P/L - loss 800
5000 5000
2. Interest suspense method
Summary of procedures
Dr HP Creditor
Cr Bank
With the last payment to the HP creditor
Dr HP interest
Cr HP interest suspense
With the HP interest for the current year
Dr HP Creditor
Cr Disposal
With any outstanding balance in the HP
creditor account
Dr Disposal
Cr HP Interest suspense
With any outstanding balance in the HP
interest suspense account
Dr Disposal
Cr Asset
With the cost of the asset
Dr Prov. for Depn.
Cr Disposal
Transferring the related depreciation
provision to the disposal account
Dr Bank
Cr Disposal
With the insurance claim for the disposal
(if any)
Dr Profit and Loss
Cr Disposal
With the loss on the disposal (Reverse the
entries for a profit on disposal)
Example 8
Example 8
Cash Price $5000
Prov for dep $3200
( A full year dep is charged in the year of purchase, but none
in the year of disposal)
HP creditor on 1 Jan 1996 $2250
Instalments $250(monthly)
Interest $50
HP interest suspense $450
The car was involved in an accident in May 1996 resulting in
a total write off, and the sum of $1000 was received from the
insurnance company.
All instalments up to and including 31 May were paid.
A payment of $930 was made on 30 June 1996 in full
settlement
HP Creditor
1996 $ 1996 $
May 31 Bank instalment 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 suspense
1996 $ 1996 $
Jan 1 Bal/f 450
Jun 30 HP interest(60*5) 300
Jun 30 Disposal 150
450 450
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 3200 Jun 30 Disposal 3200
Jun 30 Dep 3200
Jun 30 Bank
- insurance 1000
Dec 31 P/L - loss 880
5000 5000
Jun 30 HP Creditor 70
Jun 30 HP interest
Suspense 150
Include the penalty charge $80
For early termination of HP
Sellers Book
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
Hire Purchase Profit
HP profit= HP price Cash selling Price
Gross profit=Cash price-Cost of good
sold
Total Profit=HP profit+Gross profit
Interest Suspense Method
The characteristics of the interest suspense
method 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.
Summary of procedures
Dr HP debtors
Dr HP Sales
With the cash selling price of the
sale.
Dr HP debtor
Cr HP interest suspense
With the total HP interest
Dr Bank
Cr HP debtors
With the deposit and installments
received
Dr HP interest suspense
Cr HP interest / P&L(income)
With the hire purchase interest
receivable for the current period
Dr HP Sales
Cr HP Trading
Transfer the HP sales to HP trading
account
Example 9
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 year
of 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 Debtors
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
HP 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 800
1600 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)
Sales (cash price)
$
96
2400
Less: cost of goods sold 2000
400
HP Gross profit
Add: HP interest received
800
Balance Sheet as at 31 Dec (Extract)
$
96
Current Assets
HP Debtors
Less Interest suspense
2000
800
1200
HP Debtors
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
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 1997
Dec 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 800
Dec 31 P/L 800
Trading and profit and loss account for the year ended (Extract)
Sales (cash price)
$ $
96
97
$ $
2400
Less: cost of goods sold 2000
400
HP Gross profit
Add: HP interest received
800
-
-
-
800
Balance Sheet as at 31 Dec (Extract)
$ $
96
97
Current Assets
HP Debtors
Less Interest suspense
2000
800
1200
-
-
-
B. Profit suspense method
The profit suspense method has the
following characteristics:
1. The hire purchase sale is recorded at the
hire purchase price.
2. The profit is recognized in proportion of
the amount collected.
3. The gross profit and the interest income
are not accounted for separately.
Summary of procedures:
Dr HP Debtors
Dr HP Sales
With the hire purchase price.
Dr Bank
Cr HP Debtors
With the deposit and instalments
received
Dr HP Sales
Cr HP Trading
Transfer the HP Sales to HP
Trading a/c
Dr HP Trading
Cr Provision for Unrealized
profit
With the increase in the provision
for unrealized profit.
*Transfer the unearned total
profit ( unearned HP profit &
unearned GP)
Dr Provision for Unrealized
profit
Cr HP trading
With the decrease in the
provision for unrealized profit.
* Transfer the unearned total
profit (unearned HP profit &
unearned GP)
Provision for unrealized profit
= Total Profit * instalments not yet received
HP price

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


Example 10
Example 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
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 Dec
1996 and 1997, except one in arrears as at 31 Dec 1996
which was received in 1997
HP Debtors
1996 $ 1996 $
Jan 1 HP Sales
($2000*2) 4000
Dec 31 Bank-instalment
($250*4*2) 2000
Dec 31 Bal c/d 2000
4000 4000
HP Price
(a)
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)
Sales (HP price)
$ $
96
4000
Less: cost of goods sold 2000
1000
Gross profit
Balance Sheet as at 31 Dec (Extract)
96
Current Assets
HP Debtors
Less Provision for unreaslised
profit
2000
1000
1000
Less:Provision for unrealised
profit
1000
HP Debtors
1996 $ 1996 $
Jan 1 HP Sales
($2000*2) 4000
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 Price
(a)
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 1000
Dec 31 Bal c/d 0
($4000-2000)*0/4000
1000 1000
Trading and profit and loss account for the year ended (Extract)
Sales (HP price)
$ $
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
2000
1000
1000
-
-
-
Less:Increase Provision for
unrealized profit
1000
1000
Add: Decrease in prov.for unrealized
profit
1000 1000
HP Debtors
1996 $ 1996 $
Jan 1 HP Sales
($2000*2) 4000
Dec 31 Bank-instalment
($250*4*2-250) 1750
Dec 31 Bal c/d 2250
4000 4000
HP Price
(b)
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)
Sales (HP price)
$ $
96
4000
Less: cost of goods sold 2000
875
Gross profit
Balance Sheet as at 31 Dec (Extract)
96
Current Assets
HP Debtors
Less Provision for unrealized
profit
2250
1125
1125
Less:Provision for unrealized
profit
1125
HP Debtors
1996 $ 1996 $
Jan 1 HP Sales
($2000*2) 4000
Dec 31 Bank-instalment
($250*4*2-250) 1750
Dec 31 Bal c/d 2250
4000 4000
1997 1997
Jan 1 Bal b/d 2250 Dec 31 Bank- instalment 2250
HP Price
(b)
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 1125
Dec 31 Bal c/d 0
($4000-2000)*0/4000
1125 1125
Trading and profit and loss account for the year ended (Extract)
Sales (HP price)
$ $
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
2250
1125
-
-
-
Less:IncreaseProvision for
unrealised profit
1125
1125
Add: Decrease in prov.for unreasised
profit
875 1125
1125
C. A combination of the 2 methods
The combination of 2 methods has the
following characteristics:
1.The hire purchase sale is recorded at the
cash price.
2.The profit is recognized in proportion of
the amount collected.
3.The gross profit and the interest income
are accounted for separately.
4.Interest income is allocated over the
period of the hire purchase agreement on
a suitable basis
Summary of procedures
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 current
period
Dr HP trading
Cr Provision for Unrealized
profit
With the increase in the provision for
unrealized profit. (Reverse the entries for a
decrease in the provision for unrealized
profit)
Provision for unrealised profit

= (Cash price Cost ) * Instalments not yet received
Cash Price
Example 11
Example 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 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
Interest per instalment
= ($2000-1200)
8
= $100
Instalment = Capital + Interest
$250 = $150 + $100
HP Debtors
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
CashPrice
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)
Sales (cash price)
$ $
96
2400
Less: cost of goods sold 2000
200
HP profit
Balance Sheet as at 31 Dec (Extract)
96
Current Assets
HP Debtors
1200
Less:Provision for unrealised
profit
200
Add: Interest received 800
HP Debtors
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
CashPrice
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
1996 $ 1996 $
Dec 31 Bal c/d 200
($2400-2000)*1200/2400
Dec 31 HP Trading 200
1997 $ 1997 $
Dec 31 Bal b/d 200
Dec 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)
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 Debtors
1200
-

Less:IncreaseProvision for
unrealised profit
200
200
Add: Decrease in prov.for unreasised
profit
200
200
Add: Interest Received 800 800
Repossession
Repossession
It may be happen that hire purchase
debtors cannot make all of the
payments required under the agreement.
Once the hire purchase debtor stops
paying the instalments, the seller can
take away the goods. This is called
repossession.
Dr Repossession
Cr HP Creditor
With the outstanding balance for the
particular HP debtors
Interest suspense method
Dr HP interest suspense
Cr Repossession

Profit suspense method
Dr Provision for unrealized
profit
Cr Repossession

The combined method
Dr Repossession
Cr interest Receivable

With the HP interest not yet received



With the outstanding provision
transferred



With the amount of accrued HP interest
Dr Trading
Cr Repossession
With the value of the repossessed item
which is taken back into stock
Dr Bank
Cr Repossession
With the insurance claim or any sale
proceeds for the repossessed item.
Dr Profit and loss
Cr Repossession
With the loss on the repossession
(Reverse the entries for a profit on
repossession)
The value of the repossessed item
Cost * Outstanding balance of the particular HP
HP price debtor ( repossessed items)
=
(a) Using interest suspense method
Example 12 (a)
A company selling on HP has the following details:
The interest is accrued evenly throughout the period
of HP agreement
The gross profit on the sales is recognized in the year
of 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 been
default since 31 Mar 1997. The repossessed item
has been taken back into stock
HP Debtors
1997 $ 1997 $
2000 2000
Jan 1 Bal b/d 2000
Dec 31 Bank- instalment 1000
Mar 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 800
Mar 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
(b) Using profit suspense method
Example 12(b)
A company selling on HP has the following details:
The gross profit on the sales is recognized on the
basis of the cash 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 been
in default since 31 Mar 1997. The repossessed item
has been taken back into stock.

HP Debtors
1997 $ 1997 $
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 unrealised profit
1997 $ 1997 $
800 800
Dec 31 HP Trading 500
Jan 1 Bal b/d 1000
Mar 31 Repossession 500
Value of
Repossessed items
Dec 31 Bal c/d 0
(2000-1000)*0/2000
2000 2000
(c) Using the combined method
Example 12(c)
A company selling on HP has the following details:
The interest is accrued evenly throughout the period
of HP 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

All the instalments were received on the due dates,
except that payments on one of the item has been
in default since 31 Mar 1997
1. The seller repossessed the goods on the same
date (31 Mar 1997)as that the HP debtor defaulted
on the payment
2. The seller repossessed the goods on 31 June
1997, after the HP debtor defaulted on the payment


(1)
HP Debtors
1997 $ 1997 $
1200 1200
Jan 1 Bal b/d 1200
Dec 31 Bank- instalment 600
($250-100)*4
Mar 31 Repossession 600
Interest receivable
1997 $ 1997 $
Dec 31 Bank ($100*4) 400
Dec 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 $
1200 1200
Jan 1 Bal b/d 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
HP Debtors
June 30 Repossession 200
($100*2)
June 30 Interest 200
receivable
600 600
Hire Purchase Trading and
Profit and loss account
x
x
x
x
x
x
x
Hire Purchase Trading
$ $
Purchase
Add Repossession
Less closing stock
Cost of Goods sold
Gross profit
Sales cash price
x
x
Interest suspense method and the
combined method
x
x
Profit and Loss (Extract)
$ $
Loss on Repossession
HP interest
Profit on Repossession
HP profit
x
x
x
x
x
x
x
x
x
Hire Purchase Trading
$ $
Purchase
Add Repossession
Less closing stock
Cost of Goods sold
Gross profit
Sales HP price
x
x
Provision for Unrealized profit
x
Profit suspense method
x
x
Profit and Loss (Extract)
$ $
Loss on Repossession
Profit on Repossession
HP profit
x
ABC Ltd. Purchased a vehicle from Grace ltd. On Jan 1996
on hire purchase agreement. The details were as follows:

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


Using (a) the progress interest charge system and

(b) interest suspense method