HIRE PURCHASE SYSTEM A trader could could sell sell goods either either for cash cash or for for credit. credit. For goods goods sold on on credit, the payments may be made by the buyer in lump sum on a future date, or in installments spread over for a specified period of time. When goods are sold on credit, for which payment is made by the buyer in installments over a period of time, it is called purchase system or installment system. Hire Purchase System defers to the system wherein, the seller of goods delivers the goods to the buyer without transferring the ownership of goods. The payment for the goods will be made by the buyer in installments. f the buyer pays all the installments, the ownership of the goods will be transferred, on payment of the last installment. However, if the buyer does not pay for any installment, the goods will be repossessed by the seller and the money paid on earlier installments will be treated as hire charges for using the goods. So, under this system, the transaction may result in purchasing of goods by the buyer or in hiring the goods. Hence, the system is called Hire Purchase System. Difference Between and Hire Purchase
Although Although hire purchase purchase system system could could ultimately ultimately result result in sale of goods, the sale in normal sense and sale under hire purchase system are not the same. The following are the differences between sale and hire purchase. Sale Hire Purchase !. A "sale# "sale# is gover governed ned by by the sale of !. Hire Hire purcha purchase se is governe governed d by the the Hire Hire $oods Act, !%&'. Purchase Act, !%(). 2. n case of sale, the ownership of ). n cas case e of Hire Hire purc purchas hase, e, the the the goods is transferred to the ownership of goods is transferred to buyer immediately. buyer on payment of all installments. n case of hire purchase, the payment 3. n case of sale, the buyer ma*es is made in installments. payment in lumpsum. +if the lumpsum payment is made immediately on transfer of ownership and possession of goods, it is called ash Sale and if the payment is made on a specified future date, it is called credit sale. -. The buyer buyer pays pays only only for for the the price price of of -. The hire purchaser pays for the price of goods. goods and also some amount of interest. 5. n non/payment of the 0.n non/payment of any installment, the consideration the seller cannot ta*e seller can re/possess the goods. bac* the goods, but can only ta*e legal action on buyer. 1. nce nce a sale sale has has ta*e ta*en n place place,, 1.2ither the buyer or the seller can neither the seller, nor the buyer can terminate the contract at any point of time,
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terminate the contract +unless it is for genuine reason li*e damage of goods etc.3 When the buyer becomes insolvent, the seller has to underta*e the ris* of loss.
4. A sale is sub5ect to levy of sales ta6 at the time of contract of sale.
until the payments of last installment.
(. When the hire purchaser becomes insolvent, the seller can reposes the goods, and hence need not underta*e the ris* of loss. 4. n this case, the sales ta6 will be lerviable at the time of ownership +i.e. on payment of last installment3.
ase !7 +When all particulars are given 8 installments are inclusive of interest3 !. n !st 9anuary )''!, the A: ompany bought a machine from the H;T interest is charged by the hire vendor. alculate the interest for each year. ). ;r. Asho* purchased a machine on hire purchase system from :harath ;otors on !.!.)''). The cash price of the machine was =s. (-,0'' and the payment was to be made as follows7 n signing of the agreements =s. )',''' and the balance in & installments of =s.)',''' each at the end of each year. 0> interest is charged by the vendor. ;r. Asho* has decided to write off !'> depreciation annually on the diminishing balance method. Pass necessary 5ournal entries in the boo*s of ;r. Asho* 8 :harath ;otors. &. ?ational Trading ompany hired ;otor @an on Hire Purchase System over a term of ) years starting on ! st 9anuary )''-. The installments of =s. 4''' each are payable half yearly. The present cash value of the motor van is =s. )%,(-' and motor company charges interest at the rate of 1> p.a. wor*ing half yearly. The company has decided to write off !'> depreciation annually on iminishing :alance ;ethod every year on &! st ecember. raft necessary 5ournal entries 8 prepare necessary ledger accounts in the boo*s of ?ational Trading ompany. -. The following are the particulars relating to hire purchase7 Purchaser7 =am 8 co. Seller 7 Shyam 8 o. ate of Purchase7 9an.!, )''' Asset Purchased7 ;achine ash Price7 =s !),4%Payments B =s ),''' on signing of the agreement 8 the balance in & eCual annual installments of =s -,''' due on &! st ecember each year.
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=ate of nterest B 0> per annum. epreciation B )'> on the written down value each year. ;a*e 5ournal enteries 8 prepare necessary ledger accounts in boo*s of both the parties. ase )7 +When =ate of nterest is not given3 0. n !.!.)'') DE ompany
p.a. on written down value method. Show the necessary ledger accounts in the boo*s of the purchaser. 4. ;r. $upta purchased a machine on !.!.)''& under hire purchase system from ;r. Pan*a5. The cash price was =s !0,0''. The payment for the purchase is to be made as under7 n signing the agreement =s. &,''', first year end =s. 0,''', second year end =s. 0,''' and third year end =s. 0,'''. ;a*e the necessary 5ournal entries in the boo*s of ;r. $upta 8 ;r. Pan*a5 charging depreciation at !'> on diminishing balance method. ase &7 +When the nstallments are e6clusive of interest.3 %. alculate the value of each installment from the following details7 ash priceG=s. !),''' own paymentG)'> of cash price :alance of cash price is payable in & eCual installments together with interest I !' > on the outstanding cash price. !'. n !st 9anuary )''' :has*ar purchased a machine from =avi enterpirses on hire purchase basis. The particulars are as follows7 +i3 ash price =s. !,'',''' +ii3 =s. -',''' to be paid on signing the contract +iii3 :alance in & installments of =s. )',''' lus interest +iv3 nterest charged on outstanding balance at 0> +v3 epreciation at !'> p.a. on written down value method. raft the necessary 5ournal entries in the boo*s of ;r. :has*ar.
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!!. n !st 9anuary, )''' ;r. Ar5un purchased a washing machine from A5ay 2nterprises on hire purchase basis. The cash price of the machine was =s. )0,''' payable =s. 0,''' on signing the agreement and the balance in - annual installments of =s. 0,''' lus interest at 0> p.a. payable on &! st ecember each year. ;r. Ar5un writes off depreciation at !'> p.a. on diminishing value of the machine. Show the necessary ledger accounts in the boo*s of ;r. Ar5un. 8 A5ay 2nterprises. !). ;r. Ashish purchased a ;otor :i*e on hire Purchase system on !.-.)''!. Total cash price ;otor :i*e was =s. 1&,%)' payable =s. !0,%)' and three installments of =s. !1,''' each year lus interest at 0 > payable at the end of the year. epreciation is to be charged at !'> p.a. on straight line method. Prepare the necessary ledger accounts in the boo*s of ;r. Ashish. ase -7 +alculation f ash Price, when it is not given.3 !&. alculate the ash Price of an asset from the following7 =s &,''' paid at the time of agreement !3 =s )!,1'' paid at the time of ! st year )3 =s )',('' paid at the time of ) nd year &3 =s !%,4'' paid at the time of & rd year -3 =s !4,%'' paid at the time of - th year =ate of nterest I 0> p.a =ate of epreciation )0> p.a +straight line method3. !-. alculate the cash price of an asset sold under nstallment system from the following details7 own paymentG=s.1, ''' half/yearly instalmentG =s. !-,-'' half yearly instalmentG =s.!&, &'' half/yearly instalmentG=s.!),)''@ half/yearly instalmentG=s. !),!'' =ate of interestG)'> p.a. !0. ;r. =a5iv buys a ;otor ar on !.-.)'') under hire purchase system, the terms of payments are as follows7 =s.),''' to be paid on signing the agreement, =s. ),4'' at the end of the ! st year, =s. ),1'' at the end of ) nd year, =s. ),-'' at the end of & rd year and =s. ),)'' at the - th year. f the interest is charged at the rate of !'> p.a. What was the cash price of the ;otor arJ And also show the necessary ledger accounts if the rate of depreciation is )'> p.a. on reducing balance method. !1. =am purchased a motor ar on hire purchase system from Sagar ;otor on !.!.)''!. He pays =s. !',''' down payment and =s. 4,''' =s. (,''' and =s. 1,''' at the end of ! st and )nd and &rd year respectively. nterest is charged by the vendor at )'> p.a. =am writes off !'> p.a. on diminishing balance method. Prepare the necessary ledger accounts in the boo*s of ;r. =am. ase 07 +alculation of cash price with reference to annuity table3
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!(. ;ohan 8 o purchased one machine on !K!K)'') on hire purchase basis =s !',''' being paid at the time of signing the contract 8 thereafter =s !',''' being paid annually for & years. nterest was charged I 0> pa. $iven present value of an annuity of =e ! p a I 0> =s ).()&). alculate the cash price of the machine. !4. ;r =am purchases a machine on hire purchase system paying =s )',''' annually for !' years. The rate of interest charged by the vendor is 0> p.a. given the present value of annuity of =e ! for !' years I is =s (.()!(. alculate the cash price of the machine. !%. D
p. a. The annuity table shows that the present value of =e ! for one, two 8 three years is '.%0), '.%'( 8 '.41-. alculate the cash price of the machine. )'. ;r @erma purchased a machine on hire purchase systempaying =s (,(1( down payment 8 =s !',''' each at the end of ! st, )nd 8 &rd year. The rate of interest is 0> p.a $iven the present value of =e ! at 0> for one, two 8 three years respectively as '.%0)-, '.%'(' 8 '.41&%. alculate the cash price of the machine.
