HIRE PURCHASE INTEREST ALLOCATION ¡ ILLUSTRATION ON 1 JANUARI 2011, INDAH ENERPRISE bought a furniture on hire purchase from Mega Furniture. The particulars are below: CASH PRICE = RM 50,000 DEPOSIT = RM 25,500 NUMBER OF INSTALLMENTS = 6 QUATERLY INSTALLMENTS AMOUNT DUE TO EACH INSTALLMENTS = RM 6000 FOR THE FIRST FIVE INSTALLMENTS RM 4000 FOR THE LAST INSTALLMENT
INTEREST CHARGED = 7 % PER ANNUM ON THE BALANCE OUTSTANDING AT THE BEGINING OF EACH QUARTER. STRAIGHT LINE METHOD FORMULA = INTEREST CHARGED PER INSTALLMENT : Total hire purchase interest No. of installment
REDUCING BALANCE METHOD
INTEREST CHARGED : Interest rate (%) x Outstanding capital balance at the beginning of each period
CALCULATIONS : Total amount of installment ([RM6,000 ([RM6,00 0 X 5]+[RM4,000 X 1]) 34,000 + Deposit 25,500 Hire purchase purchas e price 59,500 (-) cash price (50,000) Total hire purchase purchas e interest 9,500 Interest charged
9,500 6
= RM1,583
31. 3. 201 1 30. 6.2 011 30. 9.2 011 31. 12. 201 1
OUTSTANDI NG AT THE BEGINING RM 24, 500 (50, 00025,500)
INSTA LLME NTS RM 6,000
18, 929
6,000
13,260
6,000
7, 492
6000
7% INTEREST RM
CAPITAL REPAYMENT RM
CLOSING BALANCE RM
(7 % v 24, 500 v 3/12) =429
5,571
18,929
(7 % v 18, 929v 3/12) =331 (7 % v 13, 260 v 3/12) =232 ( 7 % v 7, 492 v 3/12) =131
5, 669
13, 260
5, 768
7, 492
5, 869
1,613
SUM of THE DIGITS METHOD Calculating interest charged by allocating consecutive digits to the installments n(n+1) , where n=no. of installment 2
n=6 [n(n+1)]/2 [ 6 (6 + 1) ] /2 = 21 Interest = lease price ([RM6,000 X 5]+[RM4,000 X 1]) 34,000 Cash price (30,000) TOTAL interest 4,000 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
4,000 x 6/21 4,000 x 5/21 4,000 x 4/21 4,000 x 3/21 4,000 x 2/21 4,000 x 1/21
1,143 952 762 571 382 190 4,000
DIFFERENCES BETWEEN HIRE PURCHASE & CREDIT SALE
HIRE PURCHASE
CREDIT SALE
LEGAL TITLE OF FIXED ASSET
Remains with the seller until paid by buyer
Passes to buyer immediately
PAYMENT DEFAULT BY BUYER
Legal owner = seller Possible to repossess the asset
Legal owner = buyer Seller can only sue for unpaid installment
WHAT IS HIRE PURCHASE?
HIRE PURCHASE INTEREST ALLOCATION
ACQUIRING ASSET ON CREDIT
ACCOUNTING FOR HIRE PURCHASE TRANSACTIONS
STRAIGHT LINE METHOD REDUCING BALANCE METHOD SUM OF THE DIGITS METHOD
ENTRIES IN BUYER·S BOOK / RECORDS
p p p
p
When a buyer acquires asset under a hire purchase contract, the asset will be recorded as asset of the buyer The buyer has the right to use the asset once payment for deposit is made Ownership of the asset Legal point of view Seller Commercial point of view Buyer How to record? 1. Non-current asset a/c Dr Non-current asset a/c (at cash price) Cr Hire purchase creditor a/c (at cash price) 2. Hire purchase creditor a/c 3. Hire purchase interest expense a/c
