Hire Pirchase A122 1

7/30/2019 Hire Pirchase A122 1

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Accounting forHire Purchase

Chapter

2(Part 2)


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Chapter Outline

Procedures and rules under Hire Purchase Act 1967. Definition

hire purchase rights

sellers right

Accounting by purchaser/hirer:

recognition of interest expense

repossession

Accounting by seller/owner: recognition of interest revenue and gross profit

repossession

Disclosure requirement.


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Learning Outcomes:

By the end of this chapter, students should be

able to:

Explain the nature of hire purchase

Journalize the entry using gross method

Explain the treatment for hire purchase in

different situations Explain the disclosure requirements


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Definition

Hire Purchase Act 1967:

Hire purchase agreement includes a letting of goods with an

option to purchase and an agreement for the purchase of goods by

installments.

Legal view:

Hire Purchase is a system of acquiring goods on credit whereby

The seller of the goods is regarded as the dealer, the purchaser is

regarded as the hirer and the finance company as the owner.

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Hire-Purchase Act 1967

Hirer:- The person who takes goods from the owner under a

hire-purchase agreement.

Owner:- a person who lets a goods to a hirer under a hire-purchase

agreement.

Hire purchase price:- the total sum payable by the hirer under a hire-purchase

agreement in order to complete the purchase of goods.

Minimum deposit:- no minimum deposit prescribed, it should not less than

one-tenth (10%) of the cash price of the goods.


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Details must be stated in agreement:1) specify a date on which the hiring shall be deemed to have

commenced.

2) specify the number of installments to be paid under the

agreement by the hirer.3) specify the amount of each of installments and the person

whom and the place at which the payments of these

installments are to be made.

4) specify the time for the payment of each of those installments.5) contain a description of the goods sufficient to identity them.

6) specify the address where the goods under the hire purchase

agreement are.


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Among others, it must also set out in tabular form:

1) cash price

2) freight or delivery charges if any

3) vehicle registration fees

4) insurance

5) terms charges or interests

6) the annual percentage rate for terms charges

7) the balance originally payable under the agreement

8) the total amount payable.


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Only the following goods can be bought on hire purchase in

Malaysia :

1) all consumer goods

2) motor vehicles namely

3) invalid carriages

4) motor cycles

5) motor cars including taxi cabs and hire cars

6) goods vehicles where the maximum permissible laden weight

does not exceed 2,540 kilograms

7) buses, including stage buses


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Hire-Purchase Vs Credit Sales

Hire-purchases Credit sales

Ownership of theasset

Not transferred Transferred

Return of goods Returnable Not returnable

Repossession of

goods Yes No


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Accounting for

Hire-Purchase in

the book ofHirer


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HP in the Book of Hirer

Substance over form.

Hire-purchase price = Cash price + interest

or= Deposit + installments amount

Depreciation: cost over useful life of the asset.

Method of recording:

1. Net Method

2. Gross Method

Cost of asset = cash price


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Hirer : Interest

Interest rate: should not be more than 10% per annum. Total interest = hire-purchase price - cash price Matching principle applied: interest need to be amortized.

Method of amortization:1) Actuarial / effective interest / residual balance

2) Sum-of-the-years digit

3) Straight line


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Hirer : Interest

Illustration 1:

On 1 July 2012, ABC Bhd purchased a machine under hire-

purchase agreement with Banker Berhad. The company paid

deposit of RM1,000 and further installments of RM902 per

month for 5 month starting from 31 July 2012. The cash price

of the machine is RM5,400. Interest rate charged is 6% per

year. The current effective interest rate is 0.83% per month.


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Hirer : Interest

Solution toIllustration 1:HP price = cash deposit + installments

= 1,000 + (902 x 5)= RM5,510

Interest = HP priceCash price

= 5,5105,400

= RM110

Interest amortization?


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Hirer : Interest

1. Effective interest method:

Installment Interest(0.83%)

Principle Balance

1,000 4,400

1 902 36.52 865.48 3,534.52

2 902 29.34 872.66 2,661.86

3 902 22.09 897.91 1,781.95

4 902 14.79 887.21 894.74

5 902 7.26 894.74 0


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Hirer : Interest

Illustration 2:

On 1 July 2012, Senja Trading Co. purchased a delivery van

under hire-purchase agreement with Banker Berhad. The

company paid deposit of RM20,000 and further installments

of RM5,200 per month for 6 month starting from 31 July

2012. The cash price of the delivery van is RM50,000.

Interest rate charged is 8% per year.


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Hirer : Interest

Solution toIllustration 2:HP price = cash deposit + installments

= 20,000 + (5,200 x 6)= RM51,200

Interest = HP priceCash price

= 51,20050,000

= RM1,200

Interest amortization?


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Hirer : Interest

2. Sum-of-the-years digit:

Amortization of interest:

Number for specific installments x total interest

Total number of installments

n(n+1) = 6(6+1) = 21

2 2

Inst. Calculation Interest (RM)

1 (6/21) x 1,200 343

2 (5/21) x 1,200 286

3 (4/21) x 1,200 229

4 (3/21) x 1,200 171

5 (2/21) x 1,200 114

6 (1/21) x 1,200 57


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Hirer : Interest

2. Straight-line:

Amortization of interest = 1,200 / 6 = RM200 per month

Total interest .

Total number of installments


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Hirer : Net Method

Dr. Asset (cash price) 50,000

Cr. Account payable 50,000

(To record amount payable to seller

cash price)

Dr. Account payable 20,000

Cr. Cash 20,000

(To record payment of deposit)

Dr. Interest expense 343

Cr. Account payable 343

(To record interest expense)

Refer to Illustration 2: using sum-of-the-year method

Dr. Account payable 5,200Cr. Cash 5,200

(To record payment of instalment)

1 July 2012

31 July 2012


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Hirer : Gross Method

Dr. Asset (cash price) 50,000

Deferred interest 1,200

Cr. Account payable 51,200(To record amount payable to sellerhp price)


Cr. Cash 20,000

(To record payment of deposit)

Dr. Interest expense 343

Cr. Deferred interest 343

(To record interest expense)

Refer to Illustration 2: using sum-of-the-year method

Dr. Account payable 5,200Cr. Cash 5,200

(To record payment of instalment)

1 July 2012

31 July 2012


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HP in the Book of Hirer

Situations:

1. HP complete as per contract.

2. Hirer fail to pay installment

defaults & repossession


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Hirer:Default and Repossession

S16 - Owner has a right to repossess asset if: S16(1): hirer fails to pay 2 installments

consecutively or fail to pay last installment.

Notice should be given to hirer to notify about therepossession (Schedule 4). Owner has the right to

repossess asset after 21 days of notification.

S16(2): owner feel suspicious that asset willbe transferred to another place other than

place which stated in contract.


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S16A- If asset is returned within 21 days ofnotification, the hirer would not bear any cost related

to the repossession, storage and other cost.

S16(3): Alternatives given to hirer:a) renew the contract; or

b) settle contract before maturity date; orc) let owner to repossess goods.


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a) renew the contract:

Payment to be made:Installment in arrears

(+) interest in arrears

(+) storage/custody/repair cost

(+) repossession cost

(+) redelivery cost


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b) settle contract before maturity date:

Payment to be made:

Hire-purchase price xx(-) (deposit + installment paid) xx

(-) statutory rebate xx

(+) storage/custody/repair cost xx

(+) repossession cost xx


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Illustration 3:On 1 January 2012, Sipadan Co. purchased a drilling machinery under a hire-

purchase agreement with Siberi Berhad. The cash price of the machinery is

RM70,000 with estimated useful life of 10 years. The company paid deposit of

RM20,000 and further installments of RM4,375 per month for 12 months

starting from 31 January 2004. Interest rate charged is 5% per year.

On 15 September 2012, Sipadan Co. received a notice to repossess by the

Siberi Co. due to its failure to pay the last two installments (July & August).21 days later, the company decided to make a payment to settle the contract.

The storage and repossession costs to be borne were RM200 and RM350

respectively.


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Solution toIllustration 3:Payment to be made:

Hire-purchase price 72,500

(-) deposit + installment paid 46,250

(-) statutory rebate 192

(+) storage/custody/repair cost 200

(+) repossession cost 350

26,608

20,000 + (4,375 x6)

3(3+1) / 2 x 2,500

12(12+1) / 2


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Solution toIllustration 3:Journal entries:


Interest expense 481

Loss on hp settlement 550

Cr. Cash 26,608

Deferred interest expense 673

(6+5+4+3+2+1)/78 x 2,500

(6+5+4)/78 x 2,500


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c) let owner to repossess goods:

if: Repossess goods value+ total paid

Total net payable>hirer can claim the excess,

vice versa, hirer must pay

original unpaid balance

(hp price)

() statutory rebate1. reasonable best price, or

2. price to pay by a new hirer by cash

minus: - repossession cost

- storage cost

- sales cost/written-off goods


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Illustration 4:

Using the same information in Illustration 3:

On 10 September 2012, Sipadan Co. received a notice to

repossess by the Siberi Co. due to its failure to pay the last two

installments (July & August). The machinery was then taken

back by the owner on 1 October 2012 and incurred the followingcost: Storage RM200, reselling RM500, and repossession cost of

RM350. The price of the machinery at the repossession date was

RM30,000.


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Solution toIllustration 4:

Journal entries?

Repossess goods value + total paid

= [30,000(200 + 500 + 350)] + (4,375 x 6)

= RM55,200

Total net payable = (4,375 x 12) - 192

= 52,308

3(3+1) / 2 x 2,500

12(12+1) / 2

Total claimable = 55,20052,308

= 2,892

Amount receivable from owner


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Hirer: Default and Repossession

Journal entries on the date of repossession:

1 Oct 2012 Dr. Interest expense 481

Cr. Deferred interest 481

[(6+5+4)/78 x 2,500]Dr. Depreciation expense 5,250

Cr. Accumulated depreciation 5,250

(70,000 x 10% x 9/12)

Dr. Cash 2,892

Account payable 26,250Accumulated depreciation 5,250

Loss on repossession 35,800

Cr. Deferred interest expense 192

Machinery 70,000


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Accounting for

Hire-Purchase in

the book of

Owner


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HP in the Book of Owner

Use sales method:

Account receivables Revenue: - Gross profit (Cash priceCOGS)

- Interest revenue (Hp priceCash price)

Inventory method:

No receivables to be recordedonly when nopayment received for expired installment.


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HP in the Book of Owner

Interest revenue: to defer and contra with AR. Gross profit:

Immediate recognition based on collection

Journal entries on the agreement date:Dr. Accounts receivable xxx

Cr. Sales revenue xxx

Deferred interest revenue xxx

HP price

Cash price

HP priceCash price


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Owner:Recognition of Gross Profit

Recognition based on collection:

Gross Profit Realized

= Gross profit x (collectioninterest recognized)

Cash price


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Illustration 5:On 1 May 2011, Hijau Co. sold a risographic machine to

Merah Co. on hire purchase. The cost and cash price of themachine is RM7,000 and RM9,500 respectively. The interest

rate used is 10% per year. The agreement requires a cash

deposit of RM1,000 and 11 monthly installment of RM780

starting from 31 May 2011 and final installment of RM770.

Hijau Co. closes its account on 31 December each year.


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Journal entries?

HP price = (780 x 11) + 770 + 1,000

= RM10,350

Total interest = 10,3509,500

= RM850

GP = 9,5007,000= RM2,500


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Journal entries: Immediate recognition

1 May 2011

31 May

30 Nov 2011

Dr. Accounts receivable 10,350

Cr. Sales revenue 9,500

Deferred interest revenue 850Dr. COGS 7,000

Cr. Inventory 7,000

Dr. Cash 1,000

Cr. Accounts receivable 1,000

Dr. Cash 780

Cr. Accounts receivable 780


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Journal entries:

31 Dec 2011

Dr. Deferred interest revenue 741Cr. Interest revenue 741

(12+11+10+9+8+7+6+5)/78 x 850

Dr. Income summary 7,000Cr. COGS 7,000

Dr. Cash 780


May - Dec

Dr. Sales revenue 9,500

Cr. Income summary 9,500

Dr. Interest revenue 741

Cr. Income summary 741


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Hijau CompanyIncome Statement

For the year ended 31 Dec 2011 (partial)

Sales revenue 9,500Less: COGS 7,000

Gross profit 2,500

Other income:Interest revenue 741

Hijau CompanyBalance Sheet

31 December 2011 (partial)

Current Assets:Account receivable 3,110Less: Deferred interest revenue 109

3,001

10,350 - 1,000 - (780x8)

850 - 741


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Journal entries: Recognition based on collection

1 May 2011

31 May

30 Nov 2011

Dr. Accounts receivable 10,350

Cr. Sales revenue 9,500

Deferred interest revenue 850Dr. COGS 7,000

Cr. Inventory 7,000

Dr. Cash 1,000

Cr. Accounts receivable 1,000

Dr. Cash 780



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31 Dec 2011

Dr. Deferred interest revenue 741

Cr. Interest revenue 741

Dr. Deferred Gross Profit 7,000

Cr. COGS 7,000

Dr. Cash 780


Dr. Sales revenue 9,500

Cr. Deferred Gross Profit 9,500

Dr. Interest revenue 741



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31 Dec 2011

Dr. Deferred Gross Profit 1, 710

Cr. Gross Profit realized 1,710

Dr. Gross Profit realized 1,710

Cr. Income summary 1,710

2,500 x 6,499

9,500

[1,000 + (780 x 8)] - 741


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Hijau CompanyIncome Statement

For the year ended 31 Dec 2011 (partial)

Gross profit realized 1,710

Other income:Interest revenue 741

Hijau CompanyBalance Sheet

31 December 2011 (partial)

Current Assets:Account receivable 3,110Less: Deferred interest revenue 109

Deferred GP 7902,211

2,5001,710


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Owner:Repossession

Journalize the closing entries for:Accounts ReceivableDeferred interestDeferred GP

Transfer to Repossession account.

Recognize gain or loss from repossession.


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Owner:Repossession

Illustration 6:Refer to Illustration 5.

Assume Hijau Co. has repossessed the asset on 1 April 2012

due to failure of Merah Co. to settle the arrears since January

2012. Merah Co. also failed to return the assets after 21 days

receiving notice of repossession. The best value of the asset at

the date of the repossession is RM7,800. Hijau Co. charged

Merah Co. for repossession charge of RM360, storage RM150

and repair of RM230. The selling cost of the machine is

expected to be RM600.


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Owner:Repossession


Journal entries?

Repossess goods value

= 7,800(360 + 150 + 230)

= RM7,060

Total net receivable = 10,350 - 11

= RM10,339

Total claimable (hirer) = (7,060 + 7,240)10,339

= RM3,961

Total payment = 1,000 + (780 x 8)

= RM7,240

1(1+1) / 2 x 850

12(12+1) / 2

Amount to be paid to hirer


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Owner:Repossession


1 April 2012



(Record statutory rebate April 2005)

Dr. Repossession account 3,099

Cr. Accounts receivable 3,099(Close accounts receivable)



(Recognize interest rev. for Jan, Feb & March 2005)

(4+3+2) / 78 x 850

Dr. Inventory 7,200

Cr. Repossession account 7,200

(Record the repossess asset)

7,800 - 600


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Owner: Repossession


1 April 2012 Dr. Repossession account 740

Cr. Cash 740

(Record the repossession, storage & repair expenses)


Cr. Cash 3,961

(Record payment claimable by hirer)

Dr. Income summary 600

Cr. Repossession account 600

(Record loss on repossession)


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Owner: Repossession

Journal entries: Based on collection

1 April 2012



(Record statutory rebate April 2005)


Cr. Accounts receivable 3,099(Close accounts receivable)



(Recognize interest rev. for Jan, Feb & March 2005)

Dr. Inventory 7,200

Cr. Repossession account 7,200

(Record the repossess asset)

7,800 - 600


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Owner: Repossession


1 April 2012 Dr. Repossession account 740

Cr. Cash 740

(Record the repossession, storage & repair expenses)


Cr. Cash 3,961

(Record payment claimable by hirer)

Dr. Deferred GP 790

Cr. Repossession account 790

(Close Deferred GP account)


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Owner: Repossession


1 April 2012Dr. Repossession account 190


(Record gain on repossession)


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End of Chapter 2

Reference:

Hire Purchase Act 1967

Hire Pirchase A122 1

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