Hire Purchase Interest Allocation

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

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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