Hire Purchase Accounts
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Transcript of Hire Purchase Accounts
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 interestpaid 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 =$3200HP 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
800800800800
2800280028002800
2000200020002000
+ =
Answer:
B. Actuarial Method
Interest is charged on the outstanding balance of the cash price after the down payment is made.
1. Equal instalments2. 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 2524252425242524
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
2000200020002000
260024002200
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 instalmentsSum 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 d
ate of sale (b) First instalment due at the beginning of month follo
wing the date of sale (c) First instalment due at the date of sale.
Case (a) and (b) Interest paid
1st instalment $3600*4/10=$14402nd instalment $3600*3/10=$10803rd instalment $3600*2/10=$7204th instalment $3600*1/10=$360
Total HP interest =$13600-$10000=$3600Sum of digit= 4*(4+1)/2=10
Case ( C ) Interest paid
1st instalment $3600*3/6=$18002nd instalment $3600*2/6=$12003rd instalment $3600*1/6=$6004th instalment -
Total HP interest =$13600-$10000=$3600Sum of digit= 3*(3+1)/2=6
Concept ChartHire Purchase
Buyer Seller
Assetsaccount
Hire purchaseinterest account
Hire purchasecreditors account
Hire purchaseinterest suspense
account
Hire purchasesales
Provisionfor unrealized
profit
Hire purchasedebtors account
Purchaser’s 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 purchaser’s books.
1. Progress interest charge system2. 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 InterestApportionment
(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 assetsCr HP Creditor
With cash price of assets (at the date of purchase)
Dr HP CreditorCr Bank
With deposit and instalment paid
Dr HP InterestCr 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 year’s profit and loss account
Dr Profit and LossCr 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 1st instalment Paid Progress interest charge system:
Balance Sheet ( Instalment for 1st year)Current LiabilitiesHP Creditor (Instalment for 2nd year)
$X
Long term LiabilitiesHP Creditor (Instalment for 3rd year and so on)
X
Instalment for 2nd year – Interest payable for 2nd year
Outstanding HP creditor – HP creditor on current liabilities
For instance: after 1st instalment Paid Interest Suspense Method:
Balance Sheet ( Instalment for 1st year)Current LiabilitiesHP Creditor (Instalment for 2nd year)
$X
Long term LiabilitiesHP Creditor (Instalment for 3rd 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 – interestPayable for 2nd year
Interest payable for 2nd year
Example
Refer to textbook P.24
Example 6 ABC Ltd. purchased a vehicle from Grace Ltd. on 1 Ja
n 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 balanc
e 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 9,0001/1/96 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 96VehicleLess Pro for Dep
Current LiabilitiesHP Creditor
9000900
8100
1896
2524-628
Long Term LiabilitiesHP Creditor 4380
6276-1896
Hire purchase Creditor (Grace Ltd)1/1/96 Vehicle 9,0001/1/96 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 6,27631/12 HP Interest (6276*10%) 628
31/12 Bank-instalment 2,524
6,90431/12 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 96VehicleLess Pro for Dep
Current LiabilitiesHP Creditor
9000900
8100
97
900018007200
2086
Long Term LiabilitiesHP Creditor
1896
4380
2524-438
22944380-2086
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 6,27631/12 Hp Interest 628
31/12 Bank-instalment 2,524
6,90431/12 Balance 4,380 6,904
1/1/98 Balance b/d 4,38031/12 HP interest(4380*10%) 438
31/12 Bank-instalment 2,524 31/12 Balance 2,294
4,8184,818
Hire Purchase Interest
31/12/98 HP Creditor 438 31/12/98 P/L 438
Balance Sheet as at 31 Dec (Extract)
Fixed Assets 96VehicleLess Pro for Dep
Current LiabilitiesHP Creditor
9000900
8100
1896
97
9000 9000
98
1800 27007200 6300
2086 2294
Long Term LiabilitiesHP Creditor 4380 2294
2524-230
-
2294-2294
Hire purchase Creditor (Grace Ltd)1/1/96 Vehicle 9,0001/1/96 Bank-deposit 1,000 31/12 HP Interest 800 31/12 Bank-instalment 2,524
31/12 Balance c/d 6,2769,800 9,800
1/1/97 Balance b/d 6,27631/12 Hp Interest 628
31/12 Bank-instalment 2,524
6,904
31/12 Balance 4,380 6,904
1/1/98 Balance b/d 4,38031/12 HP interest(4380*10%) 438
31/12 Bank-instalment 2,524 31/12 Balance 2,294
4,8184,818
1/1/99 Balance b/d 229431/12 HP interest(2294*10%) 230
31/12 Bank-instalment 2,524
25242524Hire Purchase Interest
31/12/99 HP Creditor 230 31/12/99 P/L 230
Balance Sheet as at 31 Dec (Extract)
Fixed Assets 96VehicleLess Pro for Dep
Current LiabilitiesHP Creditor
9000900
8100
1896
97
9000 9000 9000
98 99
1800 2700 3600
7200 6300 5400
2086 2294 -
Long Term LiabilitiesHP 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 assetsDr HP Interest SuspenseCr HP Creditor
With the cash price of assetsWith total hire purchase interestWith the hire purchase price(at the date of purchase)
Dr HP CreditorCr Bank
With deposit and installments paid
Dr HP InterestCr HP Interest Suspense
With hire purchase interest accrued for the current year (at the year end)
Dr Profit and LossCr HP Interest
With the amount of hire purchase interest transferred to current year’s profit and loss account.
Dr Profit and LossCr 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 Ja
n 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 balanc
e 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 9,0001/1/96 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 Suspense31/12/96 HP Interest 800
(9000-1000)*10%1/1/96 HP Creditor 2096
31/12/96 Bal c/d 1296 2096
2096
Current LiabilitiesHP Creditor
Balance Sheet as at 31 Dec (Extract)
96
Long Term LiabilitiesHP Creditor
Less HP interest suspense2524628
1896
Less HP interest suspense5048668
4380
7572-2524
(7572-1296)*10%
1296-628
Hire purchase Creditor (Grace Ltd)1/1/96 Vehicle 9,0001/1/96 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 757231/12 Bank-instalment 2,524
6,904
31/12 Balance c/d 50486,904
1/1/96 HP Interest Suspense 2096
HP Interest Suspense31/12/96 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 LiabilitiesHP Creditor
Balance Sheet as at 31 Dec (Extract)
96 97
Long Term LiabilitiesHP Creditor
Less HP interest suspense2524628
2524438
1896 2086
Less HP interest suspense5048 2524668 230
4380 2294
5048-2524
(5048-668)*10%
668-438
Hire purchase Creditor (Grace Ltd)1/1/96 Vehicle 9,0001/1/96 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 757231/12 Bank-instalment 2,524
6,904
31/12 Balance c/d 50486,904
1/1/98 Balance b/d 504831/12 Bank-instalment 2,524 31/12 Balance c/d 2524
4,8184,818
1/1/96 HP Interest Suspense 2096
HP Interest Suspense31/12/96 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 LiabilitiesHP Creditor
Balance Sheet as at 31 Dec (Extract)
96 97 98
Long Term LiabilitiesHP Creditor
Less HP interest suspense2524628
2524 2524438 230
1896 22942086
Less HP interest suspense5048 2524668 230
--
4380 2294 -
2524-2524(2524-230)*10%
230-230
Hire purchase Creditor (Grace Ltd)1/1/96 Vehicle 9,0001/1/96 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 757231/12 Bank-instalment 2,524
6,904
31/12 Balance c/d 50486,904
1/1/98 Balance b/d 504831/12 Bank-instalment 2,524 31/12 Balance c/d 2524
4,8184,818
1/1/99 Balance b/d 252431/12 Bank-instalment 2,524
25242524
1/1/96 HP Interest Suspense 2096
HP Interest Suspense31/12/96 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 LiabilitiesHP Creditor
Balance Sheet as at 31 Dec (Extract)
96 97 98 99
Long Term LiabilitiesHP Creditor
Less HP interest suspense2524628
2524 2524 -438 230 -
1896 22942086 -
Less HP interest suspense5048 2524668 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 systemSummary of procedures
Dr HP creditorCr Bank
With the last payment to the HP creditor
Dr HP interestCr HP creditor
With the HP interest and penalty charges for early termination of the hire purchase contract
Dr DisposalCr Asset
With the cost of the asset
Dr Provision for depreciationCr Disposal
Transferring related depreciation provision to the disposal account
Dr BankCr Disposal
With the insurance claim for the disposal (if any)
Dr Profit and LossCr 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 i
n 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 r
esulting 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 Creditor1996 $ 1996 $May 31 Bank –instalment 1250 ($250*5)
Jan 1 Bal b/f 1800Dec 31 HP interest 300 ($50*6)June30 Bank-settlement 930Dec 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 Vehicle1996 $ 1996 $Jun 30 Vehicle 5000
Dep - Vehicle
Vehicle
1996 $ 1996 $
1996 $ 1996 $Jan b/f 5000 Jun 30 Disposal 5000
Jan 1 B/f 3200Jun 30 Disposal 3200
Jun 30 Dep 3200Jun 30 Bank - insurance 1000
Dec 31 P/L - loss 8005000 5000
2. Interest suspense methodSummary of procedures
Dr HP CreditorCr Bank
With the last payment to the HP creditor
Dr HP interestCr HP interest suspense
With the HP interest for the current year
Dr HP CreditorCr Disposal
With any outstanding balance in the HP creditor account
Dr DisposalCr HP Interest suspense
With any outstanding balance in the HP interest suspense account
Dr DisposalCr 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 LossCr 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 i
n 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 settle
ment
HP Creditor1996 $ 1996 $May 31 Bank –instalment 1250 ($250*5)
Jan 1 Bal b/f 2250
June30 Bank-settlement 930
2250 2250
HP interest1996 $ 1996 $
Dec 31 HP Creditor 300 Dec 31 P/L 300
Jun 30 Disposal 70
HP interest suspense1996 $ 1996 $
Jan 1 Bal/f 450 Jun 30 HP interest(60*5) 300Jun 30 Disposal 150
450 450
Disposal of Vehicle1996 $ 1996 $Jun 30 Vehicle 5000
Dep - Vehicle
Vehicle
1996 $ 1996 $
1996 $ 1996 $Jan b/f 5000 Jun 30 Disposal 5000
Jan 1 B/f 3200Jun 30 Disposal 3200
Jun 30 Dep 3200Jun 30 Bank - insurance 1000
Dec 31 P/L - loss 8805000 5000
Jun 30 HP Creditor 70
Jun 30 HP interest Suspense 150
Include the penalty charge $80For early termination of HP
Seller’s Book
2 Method of HP Interest Treatment(i) Profit Suspense Method(ii) HP Interest Suspense Method
*3 method of HP InterestApportionment
(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 price2. 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 debtorsDr HP Sales
With the cash selling price of the sale.
Dr HP debtorCr HP interest suspense
With the total HP interest
Dr Bank Cr HP debtors
With the deposit and installments received
Dr HP interest suspenseCr HP interest / P&L(income)
With the hire purchase interest receivable for the current period
Dr HP SalesCr HP Trading
Transfer the HP sales to HP tradingaccount
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 Debtors1996 $ 1996 $Jan 1 HP Sales ($1200*2) 2400
Jan 1 Interest suspense 1600 (2000-1200)*2
Dec 31 Bank-instalment ($250*4*2) 2000Dec 31 Bal c/d 2000
4000 4000HP Sales
1996 $ 1996 $Dec 31 HP Trading 2400 Jan 1 HP Debtors 2400
HP interest suspense1996 $ 1996 $ Dec 31 HP interest
received (2000-1200)*4/8*2 800
Jan 1 HP Debtors 1600
Dec 31 Bal c/d 8001600 1600
Cash price
HP interest received1996 $ 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
2400Less: cost of goods sold 2000
400HP Gross profitAdd: HP interest received 800
Balance Sheet as at 31 Dec (Extract)
$ 96
Current AssetsHP DebtorsLess Interest suspense
2000800
1200
HP Debtors1996 $ 1996 $Jan 1 HP Sales ($1200*2) 2400
Jan 1 Interest suspense 1600 (2000-1200)*2
Dec 31 Bank-instalment ($250*4*2) 2000Dec 31 Bal c/d 2000
4000 4000
1997 1997Jan 1 Bal b/d 2000 Dec 31 Bank- instalment 2000
HP interest suspense1996 $ 1996 $Dec 31 HP interest received (2000-1200)*4/8*2 800
Jan 1 HP Debtors 1600
Dec 31 Bal c/d 800
1600 16001997 1997Dec 31 HP interest 800 received (2000-1200)*4/8*2
Jan 1 Bal b/d 800
Interest received
1996 $ 1996 $Dec 31 HP interest suspense 800Dec 31 P/L 800
Trading and profit and loss account for the year ended (Extract)
Sales (cash price)$ $
96 97$ $
2400Less: cost of goods sold 2000
400HP Gross profitAdd: HP interest received 800
---
800
Balance Sheet as at 31 Dec (Extract)
$ $96 97
Current AssetsHP DebtorsLess Interest suspense
2000800
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 DebtorsDr HP Sales
With the hire purchase price.
Dr BankCr HP Debtors
With the deposit and instalments received
Dr HP SalesCr HP Trading
Transfer the HP Sales to HP Trading a/c
Dr HP TradingCr 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 profitCr 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 Debtors1996 $ 1996 $Jan 1 HP Sales ($2000*2) 4000
Dec 31 Bank-instalment ($250*4*2) 2000Dec 31 Bal c/d 2000
4000 4000
HP Price(a)
Provision for unrealized profit1996 $ 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
4000Less: cost of goods sold 2000
1000Gross profit
Balance Sheet as at 31 Dec (Extract) 96
Current AssetsHP DebtorsLess Provision for unreaslised profit
20001000
1000
Less:Provision for unrealised profit 1000
HP Debtors1996 $ 1996 $Jan 1 HP Sales ($2000*2) 4000
Dec 31 Bank-instalment ($250*4*2) 2000Dec 31 Bal c/d 2000
4000 40001997 1997
Jan 1 Bal b/d 2000 Dec 31 Bank- instalment 2000
HP Price(a)
Provision for unrealized profit1996 $ 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 1000Dec 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 AssetsHP DebtorsLess Provision for unrealized profit
20001000
1000
---
Less:Increase Provision for unrealized profit
1000
1000Add: Decrease in prov.for unrealized profit
1000 1000
HP Debtors1996 $ 1996 $Jan 1 HP Sales ($2000*2) 4000
Dec 31 Bank-instalment ($250*4*2-250) 1750Dec 31 Bal c/d 2250
4000 4000
HP Price(b)
Provision for unrealized profit1996 $ 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
4000Less: cost of goods sold 2000
875Gross profit
Balance Sheet as at 31 Dec (Extract) 96
Current AssetsHP DebtorsLess Provision for unrealized profit
22501125
1125
Less:Provision for unrealized profit 1125
HP Debtors1996 $ 1996 $Jan 1 HP Sales ($2000*2) 4000
Dec 31 Bank-instalment ($250*4*2-250) 1750Dec 31 Bal c/d 2250
4000 40001997 1997
Jan 1 Bal b/d 2250 Dec 31 Bank- instalment 2250
HP Price(b)
Provision for unrealized profit1996 $ 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 1125Dec 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 AssetsHP DebtorsLess Provision for unreaslised profit
22501125
---
Less:IncreaseProvision for unrealised profit
1125
1125Add: Decrease in prov.for unreasised profit
875 1125
1125
C. A combination of the 2 methodsThe 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 debtorsDr HP Sales
With the cash price.
Dr BankCr HP debtor
With the deposit received
Dr BankCr HP debtorsCr Interest receivable
With the installments received.With the capital part of the installments.With the interest receivable for the current period
Dr HP tradingCr 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 Debtors1996 $ 1996 $Jan 1 HP Sales ($1200*2) 2400
Dec 31 Bank-instalment ($250-100)*4*2 1200Dec 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 profit1996 $ 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
2400Less: cost of goods sold 2000
200HP profit
Balance Sheet as at 31 Dec (Extract) 96
Current AssetsHP Debtors 1200
Less:Provision for unrealised profit 200
Add: Interest received 800
HP Debtors1996 $ 1996 $Jan 1 HP Sales ($1200*2) 2400
Dec 31 Bank-instalment ($250-100)*4*2 1200Dec 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 profit1996 $ 1996 $
Dec 31 Bal c/d 200 ($2400-2000)*1200/2400
Dec 31 HP Trading 200
1997 $ 1997 $Dec 31 Bal b/d 200Dec 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 AssetsHP Debtors 1200 -
Less:IncreaseProvision for unrealised profit
200
200Add: Decrease in prov.for unreasised profit
200 200Add: 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 RepossessionCr HP Creditor
With the outstanding balance for the particular HP debtors
Interest suspense methodDr HP interest suspenseCr Repossession
Profit suspense methodDr Provision for unrealized profitCr Repossession
The combined methodDr RepossessionCr interest Receivable
With the HP interest not yet received
With the outstanding provision transferred
With the amount of accrued HP interest
Dr TradingCr Repossession
With the value of the repossessed item which is taken back into stock
Dr BankCr Repossession
With the insurance claim or any sale proceeds for the repossessed item.
Dr Profit and lossCr 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 Debtors1997 $ 1997 $
2000 2000
Jan 1 Bal b/d 2000 Dec 31 Bank- instalment 1000Mar 31 Repossession 1000
HP interest suspense1997 $ 1997 $
800 800
Dec 31 HP interest 400 received (2000-1200)*4/8*1
Jan 1 Bal b/d 800Mar 31 Repossession 400
Repossession1997 $ 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 1001000 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 Debtors1997 $ 1997 $Jan 1 Bal b/d 2000
Dec 31 Bank- instalment 1000Mar 31 Repossession 1000
Repossession1997 $ 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 profit1997 $ 1997 $
800 800
Dec 31 HP Trading 500
Jan 1 Bal b/d 1000Mar 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 receivable1997 $ 1997 $
Dec 31 Bank ($100*4) 400Dec 31 P/L 400
Repossession1997 $ 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 receivable1997 $ 1997 $
Dec 31 Bank ($100*4) 400
Dec 31 P/L 600
Repossession1997 $ 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 ($100*2)
June 30 Interest 200 receivable
600 600
Hire Purchase Trading and Profit and loss account
x
x
xx
x
xx
Hire Purchase Trading$ $
PurchaseAdd Repossession
Less closing stockCost of Goods soldGross profit
Sales – cash price x
x
Interest suspense method and the combined method
xx
Profit and Loss (Extract)$ $
Loss on RepossessionHP interestProfit on Repossession
HP profitxx
x
x
xx
x
xx
Hire Purchase Trading$ $
PurchaseAdd Repossession
Less closing stockCost of Goods sold
Gross profit
Sales – HP price x
x
Provision for Unrealized profit x
Profit suspense method
xx
Profit and Loss (Extract)$ $
Loss on RepossessionProfit on RepossessionHP 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 $1,000Instalment 4 equal annual instalments
First due 31 December 1996Interest 10% on outstanding balance
Depreciation 10% on cost
Using (a) the progress interest charge system and (b) interest suspense method