S-2 Hire Purchase and Instalment Sale Transactions Part 3

Recording Recordi ng Date: September 16, 2015

CA Intermediate (IPC) Course Paper 1 Accounting

Chapter 11: Hire Purchase and Instalment Sale Transactions Part 3

CA. Mayur Toshniwal Toshniwal

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Important Notes

Recording Date: September 16, 2015

The e-Lectures, PPT, Podcasts and Video lectures on ICAI Cloud Campus aim to supplement the Study Material, Practice Manual and Supplementary Study Material

The lecture recordings are made according to the syllabus and laws existing/ applicable as on the date of recording.

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Hence, students are advised to refer to the Study Material including Supplementary Study Material, if any, and other relevant legislation for latest provisions/ amendments required for forthcoming examination.

Instalment Payment system

In instalment payment system the ownership of the goods is passed immediately to the buyer on the signing the agreement. Because of this basic difference the accounting entries under instalment payment system are slightly different from those passed under the hirepurchase system. The scheme of entries is as under:

Instalment Payment system Cont…

Books of buyer: Buyer debits asset account with full cash price, credits vendor’s account with full instalment price and debits interest suspense account with the difference between full cash price and full instalment price. Interest is debited to interest suspense account (not interest account) because it includes interest in respect of a number of years.

Instalment Payment system Cont… Every year interest account is debited and interest suspense account is credited with the interest of current year. Interest account, at the end of the year, is closed by transferring to profit and loss account.

The balance of interest suspense account (this is a debit balance) is shown in the balance sheet on the asset side. Vendor is paid the instalment due to him and entry for the depreciation is passed in the usual way.

Hire Purchase V/s Instalment Payment system A hire purchase agreement is a contract of bailment coupled with an option to the hire purchaser to acquire the goods delivered to him under such an agreement. By the delivery of goods to the hire purchaser, the hire vendor merely pass with their possession, but not the ownership. The property or title to the goods is transferred to the hire-purchaser, on his paying the last instalment of the hire price or complying with some other conditions stipulated in the contract.

Hire Purchase V/s Instalment Payment system Cont…

At any time before that the hire-purchaser has the option to return the goods and, if he does so, he has only to pay the instalments of price that by then have fallen due. The right or option to purchase is the essence of hirepurchase agreement. In the event of a default by the buyer (hire purchaser) in the payment of any of the instalments of hire price, the vendor can take back the goods into his possession. This is legally permissible since the property in the goods is still with the vendor.

Hire Purchase V/s Instalment Payment system Cont…

On the other hand, it may have been agreed between the buyer and the seller that the price of the goods would be payable by instalments and the property would immediately pass to the buyer; in the event of a default of instalments, it would not be possible for the vendor to recover back the goods. He, however, would have the right to bring an action against the purchaser for the recovery of the part of the price that has not been paid to him.

Hire Purchase V/s Instalment Payment system Cont… Analysis of the hire purchase price : The hire purchase price is always greater than the cash price, since it includes interest payable over and above the price of the goods to compensate the seller for the sacrifice he has made by agreeing to receive the price by instalments and the risk that he thereby undertakes. It is thus made up of following elements:

(a) cash price;

(b) interest on unpaid instalments; and

(c) a charge to cover the risk involved in the buyer defaulting to pay one or more of instalments of price or that of his returning the goods in a damaged condition.

Hire Purchase V/s Instalment Payment system Cont…

Interest is the charge for the facility to pay the price for the goods by instalments after they have been delivered. The rate of interest is generally higher than that payable in respect of an advance or a loan since it also includes a charge to cover the risk that the hirer may fail to pay any of the instalments and, in such an event, the goods may have to be taken back into possession in whatever condition they are at the time. A separate charge on this account is not made as that would not be in keeping with the fundamental character of the hire-purchase sale.

MCQs Question Time

Q 1: Ownership of goods under Hire Purchase agreement is transferred at the time of :

A) Payment of Down Payment B) Payment of first instalment C) Payment of last instalment D) None of the above Answer: Option (C)

Q 2: Ownership of goods under Instalment sale is transferred at the time of : A) Inception of the agreement B) Payment of first instalment C) Payment of last instalment D)None of the above Answer: Option (A)

Q 3: What if the buyer defaults under Hire Purchase agreement :

A) Legal suit filed by the vendor B) Repossession of goods C) No action by the vendor D) None of the above Answer: Option (B)

Q 4: Hire Purchase price = : A) Cash price + down payment B) Cash price + total interest C) Cash price D) Sum total of instalments Answer: Option (B)

Q 5: Cash price = :

A) Hire Purchase price – total interest B) Down payment in cash C) Down payment + interest D)None of the above Answer: Option (A)

Q 6: ABC Ltd. purchased a truck on Hire purchase basis by paying 40% down payment and balance to be paid in instalments. The amount of depreciation each year would be calculated on:

A) Down payment B) Down payment + instalment (as and when paid) C) Total cash price D) No depreciation Answer: Option (C)

Q 7: Entire profit on sale under Hire Purchase agreement is credited to the profit & loss account of the year in which the sale has taken place:

A) True B) False Answer: (A)

Q 8: Interest pertaining to each accounting period is credited to the profit & loss account of that year:

A) True

B) False

Answer: Option (A)

Q 9: Products sold on Hire Purchase basis tend to have higher interest rate than sold on instalment sales basis:

A) True B) False Answer: Option (A)

Q 10: XYZ ltd. sold 50 trucks during the year on Hire Purchase basis. What is the amount of sales which it would record at the end of the year:

A) Cash received during the year B) Total Down payment received C) Cash sale price D) Non of the above Answer: Option (C)

Q 11: ABC ltd. purchased a car on hire purchase basis. It defaulted in paying the instalments and the car is repossessed by the vendor. Is ABC ltd. entitled to refund of his payments:

A) Yes

B) No

Answer: Option (B)

Q 12: Typically, which of the following category of goods would be sold under hire purchase:

A) Goods with high resale value B) Goods with low resale value C) Goods which cannot be resold D) Goods which cannot be reused Answer: Option (A)

Q 13: Possession of goods under Hire Purchase agreement is transferred at the time of:

A) Payment of Down Payment B) Payment of first instalment C) Payment of last instalment D)None of the above Answer: Option (A)

Q 14: Possession of goods under Instalment purchase is transferred at the time of: A) Payment of Down Payment B) Payment of first instalment C) Payment of last instalment D)None of the above Answer: (A)

Q 15: Typically, which of the following category of goods would be sold under instalment purchase:

A) Goods with high resale value B) Goods with low resale value C) Goods which cannot be resold D) Goods which cannot be reused Answer: Option (B)

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