You are on page 1of 35

1.

0 Hire Purchase Accounting


One way by which goods may be sold by a dealer is through Hire purchase (H P) agreement. By this agreement, the buyer hires goods and makes a deposit payment with an undertaking to pay the remaining price on installment basis over a period. Goods that are the sub ect o! H.P. agreement remain the property o! the seller until the last installment or substantial part o! the purchase price is paid. "he buyer makes periodic payment o! interest on the balance o! the HP price at the end o! a stated period over HP period. "he HP price is there!ore made up o! the cash price and interest. "he HP agreement usually contains a clause that allows the seller to take the item (repossession) i! the buyer de!aults in payment.

1.1 Types of Contract


# distinction among various types o! contract into which installment credit companies enter can be made as !ollows$

1.1.1 A lease

agreement is an agreement whereby the lessor conveys to the lessee in return !or a

payment or series o! payments, the right to use an asset !or an agreed period o! time. "he asset is usually returned to the lessor at the end o! the lease period. "itle may or may not pass to the lessee at the end o! the lease.

1.1.2 Rental and operating lease


"he customer enters into a hire agreement !or goods, normally !or a !i%ed minimum period with rights o! renewal. "he agreement does not provide the hirer with an option to purchase the goods& the goods remain the property o! the supplier, who may under take to put them in working order, and they are returned to him on termination o! the agreement.

1.1.3 Credit Sale


"his involves a contract o! sale with payment by installments. Ownership o! the goods passes on delivery by the supplier and a binding debt is created which cannot be avoided by returning the goods.

Compiled by: Suglo Abdulai

'

1.1.4 Hire Purchase.


Goods are supplied on hire to the customers until, on the !ul!illment o! certain conditions (normally the payment o! agreed number o! installments), the customer becomes entitled to e%ercise an option to purchase (normally !or a purely nominal amount). (ntil this option is e%ercised, the goods remain the property o! the supplier.

1.2 Regulatory Fra e!or" for Hire Purchase Transactions 1.2.# $ntroduction
Hire purchase transactions in Ghana are regulated by provisions in the Hire Purchase )ecree ('*+,) -./) 0*0 as amended. "he ma or provisions are as !ollows$

1.2.1 %nforce ent Conditional


1here goods are let under a hire purchase agreement, or are sold under conditional sale agreement, the owner or seller shall not be entitled to en!orce the agreement unless the agreement is in writing and signed by the hirer or buyer and by or on behal! o! all other parties to the agreement 1here the owner or the seller is not entitled to en!orce an agreement, he shall not be entitled to en!orce any contract o! guarantee relating to the agreement

1.2.3 Re&uire ent 'efore Agree ent


Be!ore any agreement is made, the seller or owner shall state orally or in writing to the prospective buyer or hirer the price at which the goods may be purchased by him !or cash and the hire purchase price or the total purchase price.

1.2.4 Re&uire ent of Agree ent


2very agreement shall contain the !ollowing # statement o! cash price o! the goods and the hire purchase price or the total purchase price. "he amount o! each installment by which the price is to be paid and the date or mode o! determining the date on which each installment is payable&

Compiled by: Suglo Abdulai

# description or list o! the goods to which the agreement relates (su!!icient enough to identi!y them). # notice with respect to rights o! the hirer or buyer to terminate agreement and restriction o! owners3 right to recover goods.

1.2.( Right of Hirer to Ter inate Agree ent


"he hirer may put an end to this agreement either by giving notice o! termination in writing to any person who is entitled to collect or receive the hire4rent. He must then pay any installments which are in arrears at the time when he gives notice. 5! the hirer !ails to take reasonable care o! the goods, he may be liable to compensate the owner !or any loss or damage caused by such !ailure. # copy o! the agreement shall be delivered or sent to the hirer or buyer within ', days a!ter making o! the agreement.

1.2.) Right to Ter inate


#t any time be!ore the !inal payment under a hire purchase agreement !alls due, the hirer shall be entitled to terminate the agreement by given written notice o! termination to any person entitled to receive payments under the agreement

1.2.* +ia'ility of Hirer after ,otice of Ter ination


1here the hirer terminates the agreement, then he shall be liable to pay the di!!erence the total o! the sums paid and one4hal! o! the hire purchase prices, or i! the agreement speci!ies a lesser amount, he shall be liable to pay the amount so speci!ied. On termination o! the agreement by the hirer, the hirer shall return the goods at his own e%pense to the premises !rom which they were originally supplied to him or to such other place as the owner or seller may direct, provided that the owner at his own e%pense, provide any additional e%pense incurred in returning the goods to the premises other than those !rom which they were originally supplied. 1here an agreement has been terminated by the hirer, i! he has !ailed to take a reasonable care o! the goods, shall be liable to compensate the owner or seller !or any loss or damage caused by such !ailure.

Compiled by: Suglo Abdulai

1here a hirer, having terminated an agreement, wrong!ully retains possession o! the goods, then in action brought by the owner to recover possession o! the goods !rom the hirer or buyer, the court shall order the goods to be delivered to the owner without giving the hirer on option to pay !or the goods (unless the court is satis!ied that having regard to the circumstances it would not be ust and e7uitable to do so).

1.2.- Hirer

ay Co plete Agree ent

"he hirer under a hire purchase agreement may give notice in writing to the owner o! his intention to complete the purchase o! the goods by paying or tendering to the owner on a speci!ied day the net balance due under the agreement, and having given such notice may complete the purchase accordingly on the day speci!ied. (the net balance due is the hire purchase price originally payable under the agreement less any amount paid or provided whether by cash or by other considerations , by or on behalf of the hirer under the agreement). "he right to complete the purchase con!erred on the hirer may be e%ercised by him #t any time during the continuance o! the agreement, or 1ithin twenty eight days a!ter the owner has taken possession o! the goods (during which period the owner shall not be entitled to dispose o!! the goods) upon paying or tendering to the owner in addition to the net balance due the reasonable costs incurred by the owner 5 and incidental to taking possession o! the goods& and any amount properly e%pended by the owner on the storage, repair or maintenance o! the goods

1.2.. Restriction on Right to Reco/er Protected 0oods


.estricted goods are goods in relation to which the !ollowing conditions are !ul!illed that the goods have been let under as hire purchase agreement that bone4hal! o! the hire purchase price has been paid (whether in pursuance o! udgment or otherwise) or tendered by or on behal! the hirer, and "he hirer has not terminated the hire purchase agreement.

"he owner shall not en!orce any right to recover possession o! protected goods !rom the hirer otherwise by an action.

Compiled by: Suglo Abdulai

5! the owner recovers possession o! protected goods !rom the hirer, the agreement i! not previously terminated, shall be terminated and the hirer shall be released !rom all liability under the agreement, and shall be entitled to recover !rom the owner all sums paid by the hirer and any security given in respect thereo!. -otwithstanding the provisions o! the immediately preceding paragraph, the court may, on the application by the hirer, make an order !or the return o! the goods to the hirer and !or the re4 scheduling o! payment due under the agreement.

1.2.. Action to Reco/er Protected 0oods


1here an owner brings an action to recover possession o! protected goods, the !ollowing provisions shall apply$ Pending the hearing o! the action, the court may upon its own motion or upon application, may such orders as it thinks ust !or the purpose o! protecting the goods !rom damage or depreciation. On hearing o! the action, the court may without pre udice to any other power (i) 8ake an order !or the speci!ic delivery o! all the goods to the owner, sub ect to the condition that the owner re!unds the hirer such part o! the sums paid as the court may direct, or (ii) 8ake an order !or the speci!ic delivery o! all the goods to the owner and postponed operation o! the order on condition that the hirer pays the unpaid balance o! the hire purchase price at such times and in such amounts as the court, having regards to the means o! the hirer o! such other conditions as the court thinks ust, or (iii) 8ake an order !or the speci!ic delivery o! a part o! the goods to the owner3s title to the remainder o! the good.

1.2..a $ plied Ter s


-otwithstanding any agreement to the contrary, in every hire purchase agreement there shall be implied # term that the hirer shall have and en oy 7uiet possession o! the goods&

Compiled by: Suglo Abdulai

# term that the goods shall be !ree !rom any charge or encumbrance in !avour o! any third party at the time when the property is to pass& # term that the owner will have a right to sell the goods at the time when the property is to pass

1here the hirer (whether e%pressly or by necessary implication) has made known to the owner the particular purpose !or which the goods are re7uired, there shall be implied a term that the goods will be reasonably !it !or that purpose. # breach o! any o! the above stated implied terms by the owner shall give the hirer a right to damages in respect o! such breach, or to such other remedy as the court may think appropriate

1.2..' $ plied Ter

as to 1erchanta'ility

5n every hire purchase agreement, there shall be implied terms that the goods will be o! merchantable 7uality at the time o! the delivery. 1here the hirer has e%amined the goods or a sample o! them be!ore delivery, the immediately preceding term shall not be implied in respect o! de!ects which the e%amination ought to have revealed

1.2..c Further i plied Ter s in Special Cases


1here goods are let under a hire purchase agreement, and the goods are so let by re!erence to a sample, there shall be implied in the agreement # term that the bulk will correspond e%actly with the sample& # term that the hirer or buyer will have a reasonable opportunity o! comparing the bulk with the sample. 1here goods are let under a hire purchase agreement and are so let by description, there shall be implied in the agreement a term that the goods will correspond e%actly with the description. # breach o! any o! these terms by the owner shall give the hirer the right to rescind the agreement.

Compiled by: Suglo Abdulai

The 1echanics of Hire Purchase Transactions


$nstall ent pay ent "he periodic installment is made up o! a portion ! the cash price (capital sum) and interest. 5t may be made up o! e7ual or une7ual amount. 5n either case, the interest portion o! the HP price may be$ (a) 27ually spread over the HP period (i.e. "he level spread method ) or (b) ;pread over the period involving une7ual amount. "his is done in such a way that interest is higher at 'st but gradually !alls as period payment is made ."hus, the interest is calculated using the sum o! year3s digit method. "hus, the !ormula to calculate the sum o! the digits is n (n<') , where n is the number o! installments. 0 $llustration 1 Political limited ac7uired a !leet o! e7uipment on hire purchase on the !ollowing terms. "he cash pri=e o! the e7uipment is GH>+9,??? while the HP price is GH>'??,???. # deposit o! >69,??? was paid and the HP price is to be paid over a period o! 9 years. Re&uire ent ;how your computation o! the annual interest payment and the period o! the capital sum assuming total annual installment are spread e7ually over 9 years period using (a) "he level spread method or straight line method. (b) ;um4o!4 years digit method.

Compiled by: Suglo Abdulai

Solution 1orkings (#) HP price Aess cash price "otal interest (b) "otal HP price )eposit paid #mount payable in installment (c) #nnual installment "otal #PP payable -o. o! years 5nstallment B :9,???C9B>'6,??? GH> '??,??? +9,??? '9,??? '??,??? 69,??? :9,??? :9,??? 9

(a) Aevel spread method C straight line method. Dear 5nstallment /apital repayment 0H2 0H2 ' '6,??? '?,??? 0 '6,??? '?,??? 6 '6,??? '?,??? , '6,??? '?,??? 9 '6,??? '?,??? (b) ;um E o! E years digit method. 3ear $nstall ent $nterest charged 0H2 0H2 ' '6,??? 9C'9 % '9,??? B 9,??? 0 '6,??? ,C'9 % '9,??? B ,,??? 6 '6,??? 6C'9 % '9,???B 6,??? , '6,??? 0C'9 % '9,???B 0,??? 9 '6,??? 'C'9 % '9,???B ',???

5nterest 0H2 6,??? 6,??? 6,??? 6,??? 6,???

Capital repay ent 0H2 +,??? *,??? '?,??? '',??? '0,???

Compiled by: Suglo Abdulai

4556S 5F ACC57,TS

The 'oo"s of the 'uyer


"hese include$ (a) #sset account (b) ;ellers3 account (c) H.P. interest ACC57,T$,0 %,TR$%S "here are two main approaches to accounting !or Hire Purchase transactions in the books o! the buyer

1ethod A8 $nterest Suspense Approach


"otal interest is recogni=ed immediately the H.P. agreement is concluded. 1hen assets is taken on Hire .Purchase. 9e'it assets #ccount Credit seller3s #ccount With the cash price of the asset. 9e'it 5nterest suspense account Credit H.P. ;ellers account With total interest payable. #ccrue interest periodically 9e'it E interest account CP F A account Credit E interest suspense account With periodic interest allocation ,48 -o payment is made at this stage& hence no entry will be made to the seller3s account. 1hen installment is paid 9e'it Eseller3s account Credit E cash or bank account With total installment payment

Compiled by: Suglo Abdulai

%:a ple one Political Atd ac7uired o!!ice e7uipment on Hire Purchase basis !rom -ana Atd on ' st Gan 0??9. "he agreement re7uires the payment o! GH>69?,???, as a deposit and annual installment o! GH >'6?,??? over !ive years ."otal interest charges amounting to GH>'9?,??? to be accrued annually using sum4 o! E years digit method. "he cash price o! the machine is GH>+9?,???. Required ;how the !ollowing accounts in the books o! the buyer !or the !irst !our years$ (') 27uipment account (0) HP Hender E -ana Atd account (6) HP interest suspense account (,) Provision !or depreciation account E using straight line method. (9) 2%tract the balance sheet !or the years 0??9, 0??:.

Compiled by: Suglo Abdulai

'?

1ethod 4 !here interest is recogni;ed annually.


1hen asset is taken on HP 9e'it E assets account Credit E ;ellers account With cash pri e of the asset 1hen interest accrues )r E interest account /r E H.P.seller account 1ith the periodic interest charge 1hen installment is paid )r4 HP seller aIc /r E cash or bank aIc With total interest charge ,ote (') "he asset is shown in the balance sheet at the cost price (cash price) (0) #ny the depreciation is calculated on the cost price o! asset (6) Obligation in respect o! the H.P. outstanding must be disclosed in the balance sheet as a liability net o! interest charges and classi!ied under $ (a) /reditors !alling due within one year i.e. !or cash price portion !alling due during the ne%t accounting period. (b) /reditors !alling due a!ter one year E !or cash price portion payable a!ter the second year !rom the balance sheet date. (,) "he HP obligation to be disclosed in the balance sheet e%cludes interest charges. %:a ple t!o "" enterprise operates a HP scheme in Ban ul. On 'st -ovember, 0??9 , BB Atd entered into an agreement and purchased one set o! computers and accessories and paid the re7uired deposit o! GH>,,06? by che7ue."he balance including interest was to be paid over a period o! three years ."he cash price o! the computer is GH>6?,???. (i) 5nterest is to be calculated at +J per annum in !ull on outstanding annual balances, but payment is to be made hal!4 yearly at 6?th #pril and 6'st Oct. Compiled by: Suglo Abdulai ''

(ii))epreciation at '?J p.a. on written down value is to be charged. Dou are re7uired to prepare in the HP buyer books$ (a) "he Hendor #ccount !or the !irst 6 years (b) #ssets account !or the !irst 0 years. (c) Balance sheet e%tract as at 6'st Oct 0??: and 0??@ SOLUTION 01/11/05cash 4,230 30/04/06 5,000 31/10/06 5,000 31/10/06 17,832 3 !0" 30/04/07cash 5,000 31/10/07cash 5,000 31/10/07balc/d 9,259 1#! $# 30/04/08cash 5,000 31/10/08cash 5,000 10!000 Vendor A/C deposit 1/11/00 Computer 30,000 cash 31/10/06 I terest 8! 2,062 cash "30,000#4230$ bal c\d 3 !0" 1/11/07balb/d 17,832 31/10/07I terest 1,427 1#! $# 1/11/02balb/d 9,259 31/10/03I terest 741 10!000

Compiled by: Suglo Abdulai

'0

Solution Packaging Aine 'C'C?9 K2 GH> 9,,??? Kuality 2ngineering GH> *,??? 'C'C?9 Packaging Aine 0,,??? 6'C'0C?9 HP interest 60,09? 09J o! (9,,???4*???) :9,09? 0,,??? ':,6'6 ,?,6'6 6'C'0C?@ Bank !inal installment 0?,6*' 0?,6*' 'C'C?: Balance bCd 6'C'0C?: HP interest (09Jo! 60,09?) GH>

'C'C?9 6'C'0C?9

Bank Band 'st installment bal cCd Bank 0nd installment Balance cCd

GH> 9,,??? '',09? :9,09? 60,09? +,?:6 ,?,6'6

6'C'0C?:

'C'C?@ balanced bCd ':,6'6 6'C'0C?@ (09J o! 60,09?) ,,?@+ 0?,6*'

6'C'0C?9 6'C'0C?: 6'C'0C?@

K2 K2 K2

Hire Purchase (HP) 5nterest GH> '',09? 6'C'0C?9 income statement +,?:6 6'C'0C?6 5nc. statement ,,?@+ 6'C'0C?@ income statement

GH> '',09? +,?:6 ,,?@+

'alance sheet as at <%:tracts=

Compiled by: Suglo Abdulai

'6

0??9 GH> Li%ed assets Packaging Aine at /ost Aess #ccumulated )epreciation Aiabilities Hire Purchase )ebts Outstanding 9,,??? 9,,?? 60,09?

0??: GH> 9,,??? '?,+?? ':,6'6 0??: GH> +,?:6 9,,??

0??@ GH 2 9,,??? ':,0??

Profit and +oss for the year %nded <e:tracts= 0??9 GH> Hire purchase interest '',09? )epreciation charge 9,,??

0??@ GH> ,,?@+ 9,,??

1ethod 2 'C'C?9 K2 Packaging Aine GH> 9,,??? GH>

'C'C?9 6'C'0C?9

Kuality 2ngineering GH> Bank *,??? 'C'C?0 Packaging Aine Bank 'st installment 0,,??? 6'C'0C?0 HP 5nterest (suspense) Bal cCd ,,,6*' @@,6*' Bank 0nd installment 0,,??? 'C?'C?6 balance bCd balance cCd 0?,6*' ,,,6*' bank !inal instalment 0?,6*' 'C'C?, balance cCd 0?,6*' Hire Purchase 5nterest ;uspense GH> 06,6*' 6'C'0C?9 5ncome ;tatement Balance cCd 6'C'0C?: 5ncome statement
09J o! (,,6*'4'0',')

GH> 9,,??? 06,6*' @@,6*' ,,,6*' ,,,6*' 0?,6*' 0?,6*'

6'C'0C?:

6'C'0C?@

6'C'0C?9 'C'C?:

K2

GH> '',09? '0,',' +,?:6

Bal. bCd '0,','

Compiled by: Suglo Abdulai

',

Balance cCd '0,',' 'C'C?@ Balance bCd ,,?@+ 6'C'0C?@ 5ncome statement
09J o! (0?,6*'4,,?@+)

,,?@+ '0,',' ,,?@+

4alance Sheet as at <%:tracts= 0??9 GH> Li%ed #ssets Packaging Aine at /ost 9,,??? Aess #ccumulated )ep. 9,,?? Aiabilities Hire Purchase )ebts Outstanding 60,09?

0??: GH> 9,,??? '?,+?? ':,6'6

0??@ GH> 9,,??? ':,0??

Profit and +oss for the year ended <e:tracts= 2##( 0??: GH> GH> Hire purchase interest '',09? +,?:6 )epreciation charge 9,,?? 9,,??

0??@ GH> ,,?@+ 9,,??

0??+ 9,,??

Compiled by: Suglo Abdulai

'9

%:a ple four "he !inancial year o! Buy Atd ends on 6? th Gune. On 'st Ganuary 0??:, Buy purchased a Hehicle !rom sell Atd under a Hire purchase agreement. "he cash price o! the Hehicle was GH> 09,??? and GH> '?,??? was paid as a deposit, the balance to be settled by '0 7uarterly installments o! GH>',:??. "he 'st installment was payable on 'st #pril 0??:, the second on Guly ';" 0??9 and so on. Buy Atd duly paid the installments as they became due. On 6? th ;eptember 0??@, the Hehicle was sold !or GH>'9,??? and the balance on the hire purchase commitment was cleared by the payment o! an agreed sum o! GH>+,9??. 5t is the accounting policy o! Buy Atd to bring Hehicles into its books at their cash price and spread the charge !or interest evenly over the three period o! the Hire purchase agreement. )epreciation was provided in respect o! the Hehicle as !rom the date o! purchase at a rate o! 0?J per annum on the straight line basis. 3ou are re&uired to show the !ollowing ledger accounts recording the above transactions in the books o! Buy Atd. i. ii. iii. iv. Hehicle #ccount (incorporating provision !or depreciation ) Provision !or depreciation account ;ell Atd Hire Purchase interest suspense account.

Ans%er% &or'ings& 1% I terest% 'o o( I stallme ts 12 )mou t per i stallme t 1,600 *e ce, *+ price ,-*. 1,600 / 12 , -*. 19,200 0ess cash price , -*. 15,000 1otal i terest (H) *! 00 2% 'o o( i stallme ts , 12 or 3 2ears% *al( 2ear , 2 i stallme ts Compiled by: Suglo Abdulai ':

3ull 2ear , 4 i stallme ts

Vehic+e Account -*. 1 4a % 06 5ell 0td# Cost o( 6ehicle 25,000 -*. 30 4u % 06 +70 a/c& 8ep% 20! (or 6 mths% 9ala ce c/d $!000 30 4u % 07 +70 a/c& 8epreciatio 9ala ce c/d 2,500 22,500

$!000 1 4ul% 2006 9ala ce b/d 17,500 !$00 !$00 1 4ul%07 17,500 30 5ept%07 Cash#8isposal proceeds 15,000 +70& 8epreciatio (or 3 mths 1,250 0oss o disposal 1,250 22,500 5,000

1,!$00 1,!$00 Se++ Li-ited Account -*. 1st 4a %06 10,000 6ehicle )ccou t 1,600 17,600 #! 00 #! 00 1st 4ul%06 Cash I stallme t 1st :ct%06 Cash I stallme t 1st 4a %07 Cash I stallme t Compiled by: Suglo Abdulai 1,600 1,600 1,600 '@ 1 4u l%07 9ala ce c/d 17,600 I terest suspe se a/c

-*.

1 4a 2006 Cash deposit paid 25,000 1st )pr%06 4,200 30 4u 06

1st )pr%07 Cash I stallme t 30 4u %07 9ala ce c/d

1,600 11,200 1,!"00

1,!"00 1 4ul %07 Cash I stallme t 1,600 1 4ul% 07 30 5ep%07 9ala ce b/d Cash to termi ate a;ree% 8,500 I terest suspe se accou t% 1,100 11! 00 11! 00

11,200

Hire.Purchase Interest Sus/ense account. -*. 1 4a %06 30 4u %06 5ell 0td 4,200 +70 a/c "2/12th / 4,200$ 700 9ala ce c/d 3,500 *! 00 *! 00 1 4ul%06 30 4u %07 9ala ce b/d 3,500 +70 a/c "4/12th /4, 200$ 1,400 9ala ce c/d 2,100 3!$00 3!$00 1 4ul% 07 30 5ept% 07 9ala ce b/d 2,100 5ell 0td#1ra s(er to close a/c 1,100 30 4u %08 +70 a/c& bala ce <ritte o(( 1,000 !100 !100 Assign ent )undas Atd purchased a machine under a hire purchase agreement on ' Ganuary 0??:. "he agreement provided !or an immediate payment o! -*.0,???, !ollowing by !ive e7ual installments o! GH.6,??? each instalment to be paid on 6? Gune and 6' )ecember respectively. "he cash price o! the machine was -*.'?,???. )undas estimated that it would have a use!ul economic li!e o! !ive years, and its residual value would then be -*.',???. 5n apportioning interest to respective accounting periods the company uses the sum o! digits method Re&uired Compiled by: Suglo Abdulai '+

(a) 1rite up the !ollowing ledger accounts !or each o! the three years to 6' )ecember 0??: and 0??+ respectively$ (i) (ii) 8achined hire purchase loan account. 8achine hire purchase interest account.

(b) ;how the !ollowing balance sheet e%tract relating to the machine as at 6' )ecember 0??: and 0??+ respectively$ (i) (ii) (iii) Li%ed assets$ machine at net book value. /reditors$ amounts payable within one year E obligation under hire purchase contract. /reditors$ amounts !alling due a!ter more than one year E obligation under hire purchase contract.

01ercise On ' Ganuary 0??@, Builders Atd ac7uired a crane !rom 27uipment Atd on hire purchase. "he terms o! the hire purchase agreement were that an initial deposit o! +?? million was payable, !ollowed by three installments o! @9*.9: million on 6' )ecember in each o! the ne%t three years !rom0??' onwards. "he cost o! the crane !or cash purchase would have been0,,?? million. 5nterest is charged on the balance outstanding as at 6' )ecember ate the rate o! 0?J per annum. "he !inancial year o! both companies ends on 6' )ecember Re&uired (a) 1hat was the amount o! hire purchase interest included in the hire purchase priceM (b) 1hat amounts o! interest would be allocated to each o! the three years i! the sum o! the digits method were usedM (c) Post the 27uipment Atd account in Builders Atd3s ledger !or 0??' using the 0?J per annum interest rate (d) ;how an e%tract !rom Builders Atd3s balance sheet relevant to the hire purchase contract as at 6' )ecember 0??' and using the !acts in (c). )epreciation on cranes is at the rate o! 0?J per annum on the outstanding balance. "he manu!acturing cost o! the crane was >',+?? million. Ans!er

Compiled by: Suglo Abdulai

'*

(a) (i) 0??: '.' 6?.9 6'.'0 6'.'0 0??@ 6?.: 6'.'0 6'.'0 0??+ 6?.: (i) 8#/H5-2 H5.2 P(./H#;2 5-"2.2;" #//O(-" 2##) '.' -*. 8achine Aoan aCc @,0+? @,0+? 0,*'0 2>.12 2##'.' Balance bCd ,+9 2##6'.'0 Pro!it and loss aCc -*. 6'.'0 Pro!it and loss aCc ,,6:+ 6'.'0 Balance cCd 0,*'0 @,0+? 2##) 2##* 6'.'0 6'.'0 Pro!it and loss aCc Balance cCd 0,,0@ ,+9 2>.12 ,+9 8#/H5-2 H5.2 P(./H#;2 AO#- #//O(-" -*. 0??: -*. Bank 0.??? '.' 8achine '?,??? Bank 6,?9: '.' 8achine interest @,0+? Bank 6,?9: Balance cCd *,':+ 1*>2-# 1*>2-# Bank Bank Balance cCd Bank 6,?9: 6,?9: 6,?9: *,':+ 6,?9: 0??@ '.' Balance bCd *,':+ *.':+ 0??+ '.' Balance bCd 6,?9:

2##* '.'

Balance cCd

1orking ;um o! the digits B 9 < , < 6 < 0 < ' B '9 ( 9 hal! year periods) 5nterest charge '*?: 5nterest charge '*?@ B B 9<, @,0+? N '9 6<0 @,0+? N '9 B B -*. ,,6:+ 0,,0@

Compiled by: Suglo Abdulai

0?

5nterest charge '??+

@,0+? N

' '9

,+9 @,0+?

(b) (i) Li%ed assets$ machines at net book value #t 6'.'0. 0??: 8achines at cost #ccumulated depreciation -et book value #t 6'.'0 0??@ 8achines at cost #ccumulated depreciation -et book value 8achines at cost #ccumulated depreciation .esidual value (H) '?,??? 6,:?? )>4## '?,??? @,0?? 2>-## '?,??? *,??? 1>###

#t 6'.'0 0??+

?or"ing )epreciation$ cost .esidual value 2conomic li!e #nnual depreciation charge on a straight4line basis

'?,??? ',??? 0'C0 years B (H)*,??? 0'C0 B (H) 6,:?? per year contract

(ii) /reditors$ amounts payable within one year4obligation under hire purchase (H) #t 6'.'0 0??: 6,:+9 #t 6'.'0 0??@ 0,9@' #t 6'.'0 0??+ 4 1orkings 6'.'0N: Balance per loan account Aess due in '*N+ Aess interest element (H) *,':+ (6,?9:) (0,,0@) (H) 0.9@' 4 4

(iii) /reditors$ amounts !alling due a!ter more than one year #t 6'.'0 0??: #t 6'.'0 0??@ #t 6'.'0 0??+

Compiled by: Suglo Abdulai

0'

Lor working see (b)(ii) above

Self test e:ercise. On 6? ;eptember 0??@, 8ion Atd, who prepares !inal accounts annually to 6? ;eptember, bought a motor lorry on hire purchase !rom the Hehicles and Linance /o. Atd. the cash price o! the lorry was GH>6,?+'. (nder the terms o! the hire purchase agreement, 8ion Atd paid a deposit o! GH>',??? on 6? ;eptember 0??@, and two installments o! GH>','** on 6? ;eptember 0??+ and 0??*. "he hire vendor charged interest at '? per cent per annum on the balance outstanding on ' October each year. #ll payments were made on the due dates. 8ion Atd maintained the motor lorry account at cost and accumulated the annual provision !or depreciation, at 09 per cent on the diminishing balance method, in a separate account. Re&uired8 a) Prepare the !ollowing accounts as they would appear in the ledger o! 8ion Atd !or the period o! the contract$ (i) (ii) (iii) (iv) Hehicles and Linance /o Atd 8otor lorry on hire purchase Provision !or depreciation o! motor lorry Hire purchase interest payable

b) ;how how the above matters would appear in the balance sheet o! 8ion Atd at 6? ;eptember 0??+

"he Hehicles and Linance /o. Atd prepares !inal accounts annually to 6? ;eptember, on which date it charges 8ion Atd with the interest due. 8ake calculations to the interest GH>

Compiled by: Suglo Abdulai

00

$, TH% 4556S 5F TH% S%++%R

Accounting records of the seller.


#part !rom ledger accounts (including HP sales, interest account, buyers or debtors account), the seller prepares HP trading account. "he method o! recording will however depend on the nature o! items involved. "he items could be o! High Halue or small and less valuable items.

<1=$n the Case of +arge and High @alue ite s 5n this case the accounting entries in the interest accounts F HP buyer accounts are the opposite o! the entries in the buyer3s books. "he two methods discussed in the books o! the buyer are applicable and the entries are the e%act opposite.

<2=HP Trading account 1here items are o! high volume and di!!icult to separate interest on each item, then a Hire Purchase "rading account may be prepared. "here are two approaches to preparing the HP trading account$ Provision !or (nreali=ed pro!it method and stock on hire method.

Compiled by: Suglo Abdulai

06

The Pro/ision for 7nreali;ed Profit 1ethod ') .ecogni=ing the total interest on a transaction on the year that the transaction takes place and there!ore adding it to the cash price. 5n this case a provision !or unreali=ed pro!it is to be made to eliminate any loading not yet earned. "he !ormula !or computing unreali=ed pro!it will be as !ollows$ /ash yet to be collected % "otal GP "otal amount due !rom debtors ("otal HP ;ales) 5nterest o! calculating the provision !or unreali=ed pro!it, the pro!it to be recogni=ed may be calculated as !ollows$ /ash collected % "otal GP "otal to be collected !rom debtors

2= Only interest accruing !or a particular accounting period, instead o! the total interest is taken into account and there!ore added to the cash prices. 5n this case, it is not necessary to provide !or unreali=ed pro!it. "he accounting entries in this case will be as !ollows$ a) !" sales made i= 9e'it debtors account Credit HP sales account 1ith cash price plus total interest ii= 9e'it HP sales Credit trading account 1ith the cash price as a trans!er to trading account iii= 9e'it HP ;#A2; Credit 5nterest suspense account 1ith total interest as a trans!er to interest suspense account i/= 9e'it interest suspense account Credit HP trading account

Compiled by: Suglo Abdulai

0,

1ith each interest accrued ,ote !" debtors in the balance sheet$ 5nstallments not yet due must be shown less interest not yet due Auestion one. 8r. )isco Atd sells pianos on Hire Purchase. He buys the pianos at GH 0,??? and sells them on the !ollowing terms$ i. /ash price GH>0,9?? each. ii. Hire purchase price GH> 6,??? payable as !ollows$ # deposit o! GH>',??? and the balance spread over !our years to be paid on e7ual installments. "he trail balance o! 8r. )isco Atd !or the year ended 6?th ;eptember 0??@ is given below$ GH> GH> Li%ed assets ',?,??? )ebtors and /reditors 66?,??? '09,??? Purchases (0@? pianos) 9,?,??? ;ales E /ash @9,??? ;ales E Hire Purchase ::?,??? ;tock 'C'?C?: :?,??? /ash and Bank Balance ,?,??? ;undry e%penses '?,??? /apital 0:?,??? 1>2##>### 1>2##>### "otal interest is spread evenly over !our years. 5nterests are separated !rom cash price and recogni=ed as they accrue annually. ;tocks at the end o! the year were 9? pianos at GH>0,??? each. Required to prepare: a. Hire purchase trading and pro!it and loss accounts b. 5nterest suspense account c. Hire purchase sales account d. Balance sheet as at 6?th ;eptember 0??@.

Compiled by: Suglo Abdulai

09

2uestion t%o :((i so started busi ess o 1st :ctober 2006, selli ; pho es o( o e sta dard t2pe o hire purchase terms% 8uri ; the 2ear to 30th 5eptember 2007, he purchased pho es at u i(orm price o( -*.60 a d sold 1,900 pho es at a total price u der hire purchase a;reeme ts o( -*.100 per pho e pa2able b2 a i itial deposit o( -*.30 a d 10 =uarterl2 i stallme t o( -*.7% 1he (ollo<i ; trail bala ces <as e/tracted (rom :((i so>s boo?s at 30th 5eptember 2007% (H) Capital 8ra<i ;s 3i/ed assets +urchases Cash collected (rom customers @e t, rates a d i sura ce Aa;es -e eral e/pe ses 9ala ce at ba ? 5u dr2 trade creditors 4,000 10,000 120,000 83,600 4,500 8,600 10,270 10,630 8,400 1"3!000 1"3!000 (H) 76,000

1he perso al accou ts o( customers are memora dum records "i%e% the2 do ot (orm part o( double e tr2 s2stem% Compiled by: Suglo Abdulai 0:

:((i so prepares accou ts o the basis o( ta?i ; credit "i cludi ; i terest$ i proportio to cash collected (rom customers% 4e5uired6 +repare :((i so>s hire purchase tradi ; accou t a d pro(it a d loss accou t (or the 2ear e ded 30 5eptember 2007 a d a bala ce sheet as at that date%

2uestion three )?e2 comme ced busi ess o sta dard t2pe o

1 st 4a uar2 2006% *e sells re(ri;erators o( o e

hire purchase terms% 1he total amou t i cludi ; i terest

pa2able (or each re(ri;erator is -*. 300% Customers are re=uired to pa2 i itial deposit o( -*.60, (ollo<ed b2 ei;ht =uarterl2 i stallme ts o( -*30 each% 1he cost o( each re(ri;erator to )?e2 is -*.200% 1he (ollo<i ; trail bala ce has bee e/tracted (rom the boo?s o( )?e2 0td as o 31 st 8ecember 2006% (H) 100,000 10,000 4,000 19,600 16,600 180,000 76,500 400 12,800 5,500 1 !,00 1 !,00 8uri ; the 2ear 850 pho es <ere sold o hire purchase terms% Capital 3i/ed )ssets 8ra<i ;s 9a ? oBerdra(t Creditors +urchases Cash collected (rom customers 9a ? i terest Aa;es a d salaries -e eral e/pe ses (H)

Compiled by: Suglo Abdulai

0@

1he a

ual accou ts are prepared o

the basis o( ta?i ; credit (or pro(it

"i cludi ; i terest$ i proportio to the cash collected (rom customers% 4e5uired6 +repare a hire purchase tradi ; accou ts, a d the pro(it a d loss accou t (or the 2ear e ded 31st 8ecember 2006 a d a bala ce sheet as at that date% I; ore depreciatio o( (i/ed assets a d sho< all <or?i ;s%

Auestion four "he !ollowing in!ormation relates to 8ammy O who supplies Oitchen wares on the !ollowing terms$ 0H2 /ost o! materials, Aabour and overheads /ash price Hire purchase price @9? ',??? ',0??

"he total amount is repayable in twelve e7ual installments, the !irst installment payable when work is completed and the remaining installments payable on the !irst day o! the month !ollowing. Gross pro!it is deemed to be earned e7ually over the li!e o! the contract and !inance charge spread over the li!e o! the agreement using the sum o! the digits method. "he number o! units sold !or the period to 6'st may 0??@ is as !ollows$ On Hire Purchase Ganuary 0 Lebruary , 8arch : #pril 9 8ay @ st 8ammy O commenced business on ' )ecember 0??:. "rial balance as at 6'st 8ay 0??@ !or /ash , 6 , 9 9

Compiled by: Suglo Abdulai

0+

0H2 /apital )rawings /ash sales 8aterials purchased 1ages HP ;ales Linance charge 5nstallments receivable Bank 2%penses ,,???

0H2 ' ?,??? 0',???

0*,??? @,??? 0,,??? ,,+?? 00,@?? ,,??* ','?* )3>-#. )3>-#.

;tock o! material as at 6'st 8ay 0??@ was GH>0,09? You are required to prepare the pro!it and loss account !or the year ended 6' st 8ay 0??@ and a balance sheet as at that date.

Auestion fi/e 8ion Atd started business on ' October 0??9 selling machines o! one standard type on hire purchase terms. )uring the year to 6? ;eptember 0??: he purchased machines at a uni!orm price o! GH>:? and sold ',*?? machines at a total price under hire purchase agreements o! GH>'?? per machine, payable by an initial deposit o! GH>6? and '? 7uarterly installments o! GH>@. "he !ollowing trial balance was e%tracted !rom /raven3s books as at 6? ;eptember 0??:. GH> GH> /apital @:,??? )rawings ,,??? Li%ed assets '?,??? Purchases '0?,??? /ash collected !rom customers +6,:?? .ent, rates and insurance ,,9?? 1ages +,:?? General e%penses '?,0@? Balance at bank '?,:6? ;undry trade creditors +,,?? ':+,??? ':+,??? "he personal accounts o! customers are memorandum records (i.e. they are not part o! the double entry system). /raven prepares his annual accounts on the basis o! taking credit !or pro!it (including interest) in proportion to cash collected !rom customers. Prepare /raven3s hire purchase trading account and a pro!it and loss account !or the year ended 6? ;eptember 0??: and a balance sheet as at that date. 5gnore depreciation o! !i%ed assets.

Compiled by: Suglo Abdulai

0*

1ion +td Hire purchse trading Account for the year ended 3# Septe 'er 2##) 0H2 ;ales at hire purchase price (',*?? N '??) Purchases '0?,??? #ess stock ('??N:?) :,??? '',,??? Provision !or unrealised pro!it and interest ,0,9:? Gross pro!it less rent ,,9?? wages +,:?? general e%penses '?,0@? -et pro!it P/ash yet to be collected '*?,??? E +6,:?? B '?:,,?? "here!ore provision N @:,??? B ,0,9:?

0H2 '*?,???

'9:,9:? 66,,,? 06,6@? '?,?@?

Li%ed assets Current assets ;tock HP debtors #ess provision& unrealised pro!it and interest Bank Less Current liabilities /reditors 1orking capital

'?,??? :,??? '?:,,?? ,0,9:? :6,+,? '?,:6? +?,,@? +,,?? @0,?@? +0,?@?

Compiled by: Suglo Abdulai

6?

Financed by; /apital Balance at '.'?.0??9 Add net pro!it #ess )rawings

@:,??? '?,?@? +:,?@? ,,??? +0,?@?

Auestion si: -OO-O Atd commenced business on ' Ganuary 0??+. He sells re!rigerators, all o! one standard type, on hire purchase terms. "he total amount, including interest, payable !or each re!rigerator, is GH>6??. /ustomers are re7uired to pay an initial deposit o! GH>:?, !ollowed by eight 7uarterly installments o! GH>6? each. "he cost o! each re!rigerator to -OO-O A") is GH>0??. "he !ollowing trial balance was e%tracted !rom -OO-O A")3s books as on 6' )ecember 0??+. GH> GH> /apital '??,??? Li%ed assets '?,??? )rawings ,,??? Bank overdra!t '*,:?? /reditors ':,:?? Purchases '+?,??? /ash collected !rom customers ,?? Bank interest '0,+?? 1ages and salaries 9,9?? General e%penses GH>0'0,@?? GH>0'0,@?? +9? machines were sold on hire purchase terms during 0??+. "he annual accounts are prepared on the basis o! taking credit !or pro!it (including interest) in proportion to the cash collected !rom customers. 3ou are re&uired to prepare the hire purchase trading account, and the pro!it and loss account !or the year 0??+ and balance sheet as on 6' )ecember 0??+. 5gnore depreciation o! !i%ed assets. ;how your calculations.

Compiled by: Suglo Abdulai

6'

,55,5 +td Hire Purchase Trading and Profit and +oss Account for the year ended 31 9ec. 2##0H2 0H2 ;ales at hire purchase price (+9? N 6??) Purchases Aess& stock (9?N0??) /ost o! goods sold Provision o! unrealised pro!it Gross pro!it Aess 1ages and salaries General e%penses Bank interest -et pro!it -et pro!it 4alance sheet as at 31 9ece 'er 2##Li%ed assets Current assets ;tock in ware house Hire purchase debtors Aess provision !or unrealised pro!it +ess current lia'ilities Compiled by: Suglo Abdulai 60 '?,??? '@+,9?? (9*,9??) ''*,??? '0*,??? 099,??? '+?,??? '?,??? '@?,??? 9*,9?? '0,+?? 9,9?? ,?? '+,@?? )>-##

00*,9?? 09,9??

/reditors Bank overdra!t Financed 'y8 /apital /ash introduced #dd net pro!it Aess drawings

':,:?? '*,:??

6:,0?? 1#2>-## '??,??? :,+?? '?:,+?? (,,???) 1#2>-##

Repossession of 0oods8 1here a hirer de!aults in the payment o! installments, the seller has the right to repossess the goods. "he goods are usually reconditioned and either sold almost immediately or returned to stock !or !uture sale. Procedure. (pon repossession it is necessary to remove the outstanding amount on the repossessed goods !rom hire4purchase debtors. "he provision !or unearned pro!it made on the outstanding debt must also be removed. "hese accounts are de'ited and credited respectively to a repossession account. 1ere e%penses are incurred in order to recondition these goods !or !urther sale& the costs are debited to repossessions account. 5! the asset is resold immediately, the proceeds may be credited to repossessions account and the net pro!it or loss taken to trading account. 1here the asset is not sold immediately, the balance on repossession account is normally as the asset stock value, however, sometimes a new value is placed on the asset !or stock purposes, in which case it must

Compiled by: Suglo Abdulai

66

be taken out o! repossession account at that value, and any di!!erence on the repossession account written o!! to trading account. "hus the accounting entries can be summari=ed as !ollows$ "he accounting entries necessary in case o! repossession are$ a) /ancel the indebtedness o! the de!aulting H purchaser3s account 9e'it repossession account Credit )ebtors account b) Close the !" sales account and ma$e a transfer to repossession account 9e'it Hire purchase sales Credit .epossessions c) %he balance on repossession account represents receipts from defaulting !ire "urchaser 9e'it repossession #ccount Credit "rading #ccount d) &n valuing the goods ta$en bac$ 9e'it stocks Credit trading #ccount or show as part o! stock to be deducted !rom goods available !or sale I++ustration6 /harlsey Atd sells computers !or cash and !or hire purchase terms. "he cost o! the computer is GH>',@*? and it has a cash selling price o! GH>0,69?. "he hire purchase agreements include the !ollowing terms$ 5nitial deposit4 GH> 069 8onthly installments4'0 #mount per installment4 GH> 0??

"he company prepares accounts to 6'st 8arch each year. On 'st Ganuary 0??:, the company entered into an agreement with 8r. Opuni and it was agreed that the installments should !all due on the !irst day o! each month starting !rom 'st Lebruary 0??:. 8r. Opuni paid !ive installments and on 0nd Guly intimated his inability to continue with the payments. "he machine was repossessed on '?th Guly and a!ter reconditioning costs o! >'9? it was returned to stock a value o! GH>',???. Compiled by: Suglo Abdulai 6,

Required: ;how the necessary entries in the books o! /harlsey Atd.

%arly rede ption. # similar ad ustment is made where a hirer wishes to redeem his contract be!ore the agreed date, !or the payment o! a lump sum. 5n such a case the lump sum includes the option to purchase.

$llustration8 /harlsey Atd sells computers !or cash and !or hire purchase terms. "he cost o! the computer is GH>',@*? and it has a cash selling price o! GH>0,69?. "he hire purchase agreements include the !ollowing terms$ 5nitial deposit4 GH> 069 8onthly installments4'0 #mount per installment4 GH>0??

"he company prepares accounts to 6'st 8arch each year. On 'st Ganuary 0??:, the company entered into an agreement with 8r. Opuni and it was agreed that the installments should !all due on the !irst day o! each month starting !rom 'st Lebruary 0??:. 8r. Opuni paid !ive installments and on 0nd Guly intimated his inability to continue with the payments. 8r. Opuni there!ore paid GH>',6?? or immediate title on '?th Guly. Required: ;how the necessary entries in the books o! /harlsey Atd.

Compiled by: Suglo Abdulai

69

You might also like