Mada za sehemu hiiHire Purchase AccountingMada 5
- Nature of Hire purchase
- Calculation for interest in hire purchase
- Accounting entries for recording transactions
- Repossessions of Assets
- Final Accounts on Hire purchase
When the asset is purchased on hire purchase, it is assumed that the purchaser has full intention of paying all the instalments. It is believed that hire purchase is just a method of financing non-current assets. In this situation, on purchase of non-current assets, the respective non-current asset account is debited with the total amount of cash price, and the corresponding credit is given to hire vendor's account. Interest is recognized and accounted for at the time when instalments become due by debiting the interest account and crediting the hire vendor's account. For the purpose of accounting for initial cash down payment and annual instalments, the hire vendor's account is debited on the relevant date and crediting the bank/cash account. The following are accounting entries in the books of hire purchaser.
| S/N | Transaction | Accounting Entries |
|---|---|---|
| 1 | When the asset is purchased on hire purchase. | Dr. Asset Account xx Cr. Hire Vendor Account xx (With the total cash price of an asset purchased) |
| 2 | When cash down payment is made. | Dr. Hire Vendor Account xx Cr. Bank/Cash Account xx (With the amount of down payment paid) |
| 3 | When the first installment becomes due. | Dr. Interest Account xx Cr. Hire Vendor Account xx (With the amount of hire purchase interest accrued) |
| 4 | When installments are paid. | Dr. Hire Vendor Account xx Cr. Bank/Cash Account xx (With the amount installment paid) |
| 5 | For depreciation charge (at the end of accounting period). | Dr. Depreciation Expense Account xx Cr. Accumulated Depreciation Account xx (With the amount of depreciation charged per annum) |
| 6 | For transfer of interest and depreciation to profit and loss account. | Dr. Profit or Loss Account xx Cr. Interest Account xx Cr. Depreciation Account xx (With the amount depreciation and hire purchase interest written off in that particular period) |
Note that depreciation on assets bought on hire purchase agreement is calculated on cash price.
A crushing machine was bought by MZEE Ltd. on hire purchase agreement at price of TZS 7,238,044.4 from MEKO Supplies Ltd. on 1st January, 2018. The agreed price was paid by annual instalments of TZS 2,412,760, TZS 2,412,760, and TZS 2,412,760; on 31st December, of 2018, 2019 and 2020 respectively. The cash price was TZS 6,000,000, while the rate of interest was 10% per annum. Depreciation was calculated using straight line method at the rate of 20% per annum.
Required: Prepare the following accounts in the books of MZEE Ltd.:
- Crushing machine account
- MEKO Supplies Ltd. Account
- Hire purchase interest account
- Depreciation on crushing machine account
- Income statement extract
- Statement of financial position extract
| Date | Details | Amount (Dr) | Date | Details | Amount (Cr) |
|---|---|---|---|---|---|
| 01st Jan., 2018 | MEKO Supplies Ltd. | 6,000,000 | 31st Dec., 2018 | Balance c/d | 6,000,000 |
| 01st Jan., 2019 | Balance b/d | 6,000,000 | 31st Dec., 2019 | Balance c/d | 6,000,000 |
| 01st Jan., 2020 | Balance b/d | 6,000,000 | 31st Dec., 2020 | Balance c/d | 6,000,000 |
| Date | Details | Amount (Dr) | Date | Details | Amount (Cr) |
|---|---|---|---|---|---|
| 31st Dec., 2018 | MEKO Supplies Ltd. | 600,000 | 31st Dec., 2018 | Profit or loss | 600,000 |
| 31st Dec., 2019 | MEKO Supplies Ltd. | 418,724 | 31st Dec., 2019 | Profit or loss | 418,724 |
| 31st Dec., 2020 | MEKO Supplies Ltd. | 219,320.4 | 31st Dec., 2020 | Profit or loss | 219,320.4 |
| Date | Details | Amount (Dr) | Date | Details | Amount (Cr) |
|---|---|---|---|---|---|
| 31st Dec., 2018 | Bank | 2,412,760 | 31st Dec., 2018 | Balance c/d | 4,187,240 |
| 31st Dec., 2019 | Bank | 6,600,000 | 31st Dec., 2019 | Balance c/d | 4,605,964 |
| 31st Dec., 2020 | Bank | 2,412,524 | 31st Dec., 2020 | Balance c/d | 2,412,524 |
| Date | Details | Amount (Dr) | Date | Details | Amount (Cr) |
|---|---|---|---|---|---|
| 31st Dec., 2018 | Balance c/d | 1,200,000 | 31st Dec., 2018 | Profit or loss | 1,200,000 |
| 31st Dec., 2019 | Balance c/d | 2,400,000 | 31st Dec., 2019 | Profit or loss | 2,400,000 |
| 31st Dec., 2020 | Balance c/d | 3,600,000 | 31st Dec., 2020 | Profit or loss | 3,600,000 |
| Date | Details | Amount |
|---|---|---|
| 31st Dec., 2018 | Depreciation expense | 1,200,000 |
| 31st Dec., 2018 | Hire purchase interest | 600,000 |
| 31st Dec., 2019 | Depreciation expense | 1,200,000 |
| 31st Dec., 2019 | Hire purchase interest | 418,724 |
| 31st Dec., 2020 | Depreciation expense | 1,200,000 |
| 31st Dec., 2020 | Hire purchase interest | 219,320.4 |
| Year | Details | Amount |
|---|---|---|
| 2018 | Non-current assets: Crushing machine at cost | 6,000,000 |
| 2018 | Less: Provision for depreciation | 1,200,000 |
| 2018 | Net book value | 4,800,000 |
| 2018 | Non-current liabilities: MEKO Supplies Ltd. | 2,193,204 |
| 2018 | Current liabilities: MEKO Supplies Ltd. | 1,994,036 |
| 2019 | Non-current assets: Crushing machine at cost | 6,000,000 |
| 2019 | Less: Provision for depreciation | 2,400,000 |
| 2019 | Net book value | 3,600,000 |
| 2019 | Non-current liabilities: MEKO Supplies Ltd. | - |
| 2019 | Current liabilities: MEKO Supplies Ltd. | 2,193,204 |
| 2020 | Non-current assets: Crushing machine at cost | 6,000,000 |
| 2020 | Less: Provision for depreciation | 3,600,000 |
| 2020 | Net book value | 2,400,000 |
| 2020 | Non-current liabilities: MEKO Supplies Ltd. | - |
| 2020 | Current liabilities: MEKO Supplies Ltd. | - |
The hire purchase sale is just like an ordinary sale, except that, with hire purchase, payment is deferred over a period for which the buyer is charged with interest. The vendor debits the hire purchaser's account with full cash price, crediting the hire sales account. The interest amount is debited to hire purchaser's account, when the instalments become due, crediting the hire interest account. Instalment amounts received are credited to the hire purchaser's account and debited to bank/cash account.
| S/N | Transaction | Accounting Entries |
|---|---|---|
| 1 | On sale of goods under hire purchase | Dr. Hire purchaser account xx Cr. Sales account xx |
| 2 | On receiving cash down payment | Dr. Bank/cash account xx Cr. Hire purchaser account xx |
| 3 | When hire purchase interest becomes due | Dr. Hire purchaser account xx Cr. Hire interest account xx |
| 4 | On receiving instalments | Dr. Bank/cash account xx Cr. Hire purchaser account xx |
On 1st January, 2018 HAGAI Ltd. acquired a motor van from FAHARI Ltd. on hire purchase agreement. The terms of the contract were as follows:
- The cash price of the van was TZS 100,000,000;
- TZS 40,000,000 was to be paid immediately on signing of the contract;
- The balance was to be paid in three annual instalments of TZS 20,000,000 plus interest;
- Interest chargeable on the outstanding balance was 10% per annum;
- Cost of the motor van to FAHARI Ltd. was TZS 80,000,000; and
- Depreciation is to be written-off using the straight-line method at 20% per annum.
Required: Open up the relevant accounts in the books of FAHARI Ltd. from 1st January, 2018 to 31st December, 2020.
| Date | Details | Amount | Date | Details | Amount |
|---|---|---|---|---|---|
| 01st Jan., 2018 | Hire purchase sales | 100,000 | 31st Dec., 2018 | Bank - deposit | 40,000 |
| 31st Dec., 2018 | Hire purchase interest | 6,000 | 31st Dec., 2018 | Bank - instalment | 26,000 |
| 01st Jan., 2019 | Balance b/d | 106,000 | 31st Dec., 2019 | Bank - instalment | 24,000 |
| 31st Dec., 2019 | Hire purchase interest | 4,000 | 31st Dec., 2019 | Balance c/d | 44,000 |
| 01st Jan., 2020 | Balance b/d | 44,000 | 31st Dec., 2020 | Bank - instalment | 22,000 |
| 31st Dec., 2020 | Hire purchase interest | 2,000 | 31st Dec., 2020 | Balance c/d | 22,000 |
| Date | Details | Amount | Date | Details | Amount |
|---|---|---|---|---|---|
| 01st Jan., 2018 | Hire purchase trading | 100,000 | 01st Jan., 2018 | HAGAI Ltd. | 100,000 |
| Date | Details | Amount | Date | Details | Amount |
|---|---|---|---|---|---|
| 01st Jan., 2018 | HAGAI Ltd. | 40,000 | 31st Dec., 2018 | HAGAI Ltd. | 26,000 |
| 31st Dec., 2019 | HAGAI Ltd. | 24,000 | 31st Dec., 2020 | HAGAI Ltd. | 22,000 |
| Date | Details | Amount | Date | Details | Amount |
|---|---|---|---|---|---|
| 31st Dec., 2018 | Profit or loss | 6,000 | 31st Dec., 2018 | HAGAI Ltd. | 6,000 |
| 31st Dec., 2019 | Profit or loss | 4,000 | 31st Dec., 2019 | HAGAI Ltd. | 4,000 |
| 31st Dec., 2020 | Profit or loss | 2,000 | 31st Dec., 2020 | HAGAI Ltd. | 2,000 |
| Date | Details | Amount | Date | Details | Amount |
|---|---|---|---|---|---|
| 31st Dec., 2018 | Cost of goods sold | 80,000 | 31st Dec., 2018 | Gross profit | 20,000 |
| 31st Dec., 2018 | Hire purchase sales | 100,000 | 31st Dec., 2018 | Hire purchase sales | 100,000 |
| Date | Details | Amount | Date | Details | Amount |
|---|---|---|---|---|---|
| 31st Dec., 2018 | Hire purchase interest | 6,000 | 31st Dec., 2018 | Gross profit on hire purchase trading | 20,000 |
| 31st Dec., 2019 | Hire purchase interest | 4,000 | 31st Dec., 2020 | Hire purchase interest | 2,000 |
The hire purchase interest suspense account is prepared in case the total interest should be determined, recognized, and recorded in total at the time of signing the hire purchase agreement. In this case the total interest not yet accrued is posted to hire purchase interest suspense account. In each of the subsequent due dates, interest accrued for that period is transferred from hire purchase interest suspense account to hire purchase interest income account. Any balance in the hire purchase interest suspense account represents the amount to be apportioned to hire purchase interest income account for next periods. At the year-end, the balance in the suspense account will be shown as a deduction from the hire purchase account. The standard journal entries in the books of hire vendor are summarized as follows:
| S/N | Transaction | Accounting Entries |
|---|---|---|
| 1 | When goods are sold and delivered on hire purchase terms | Dr. Hire purchaser account xx (Cash price + Total interest) Cr. Hire purchase sales account (cash price) xx Cr. Hire purchase interest suspense account (total interest) xx |
| 2 | When down payment is received | Dr. Bank account xx Cr. Hire purchaser account xx |
| 3 | When instalment is received | Dr. Bank account xx Cr. Hire purchaser account xx |
| 4 | To record interest for a particular financial period | Dr. Hire purchase interest suspense account xx Cr. Hire purchase interest income account xx (With the interest portion charged for the financial period) |
| 5 | Closing the interest and hire purchase sales accounts at the year-end | Dr. Hire purchase interest account xx Cr. Hire purchase sales account xx Cr. Income statement xx |
HIRESHI Company Ltd. is a firm dealing with production of concrete blocks that are used for building purposes. On 1st January, 2018, the firm acquired a concrete mixer machine from KILIMANI Traders on hire purchase agreement. The terms of sale were as follows:
- Cash price of the mixer machine was TZS 500,000
- TZS 200,000 were to be paid on signing of the contract
- The balance was to be paid in annual instalments of TZS 100,000 plus interest.
- Interest chargeable on the outstanding balance was 6% p.a.
- Depreciation at 20% per annum is to be written-off using the straight-line method.
Required:
- Prepare the relevant accounts in the books of KILIMANI Traders from 1st January, 2018 to 31st December, 2020, using the hire purchase interest method.
- Prepare the relevant accounts in the books of KILIMANI Traders from 1st January, 2018 to 31st December, 2020, using the hire purchase interest suspense method.
| Date | Details | Amount (Dr) | Date | Details | Amount (Cr) |
|---|---|---|---|---|---|
| 01st Jan., 2018 | Hire purchase sales | 500,000 | 31st Dec., 2018 | Bank - deposit | 200,000 |
| 31st Dec., 2018 | Hire purchase interest | 18,000 | 31st Dec., 2018 | Bank - instalment | 118,000 |
| 01st Jan., 2019 | Balance b/d | 518,000 | 31st Dec., 2019 | Bank - instalment | 200,000 |
| 31st Dec., 2019 | Hire purchase interest | 12,000 | 31st Dec., 2019 | Balance c/d | 518,000 |
| 01st Jan., 2020 | Balance b/d | 212,000 | 31st Dec., 2020 | Bank - instalment | 112,000 |
| 31st Dec., 2020 | Hire purchase interest | 6,000 | 31st Dec., 2020 | Balance c/d | 106,000 |
| Date | Details | Amount (Dr) | Date | Details | Amount (Cr) |
|---|---|---|---|---|---|
| 31st Dec., 2018 | Hire purchase trading | 500,000 | 01st Jan., 2018 | HIRESHI Co. Ltd. | 500,000 |
| Date | Details | Amount (Dr) | Date | Details | Amount (Cr) |
|---|---|---|---|---|---|
| 01st Jan., 2018 | HIRESHI Co. Ltd. | 200,000 | 31st Dec., 2018 | HIRESHI Co. Ltd. | 118,000 |
| 31st Dec., 2019 | HIRESHI Co. Ltd. | 112,000 | 31st Dec., 2020 | HIRESHI Co. Ltd. | 106,000 |
| Date | Details | Amount (Dr) | Date | Details | Amount (Cr) |
|---|---|---|---|---|---|
| 31st Dec., 2018 | Profit or loss | 18,000 | 31st Dec., 2018 | HIRESHI Co. Ltd. | 18,000 |
| 31st Dec., 2019 | Profit or loss | 12,000 | 31st Dec., 2019 | HIRESHI Co. Ltd. | 12,000 |
| 31st Dec., 2020 | Profit or loss | 6,000 | 31st Dec., 2020 | HIRESHI Co. Ltd. | 6,000 |
| Date | Details | Amount (Dr) | Date | Details | Amount (Cr) |
|---|---|---|---|---|---|
| 31st Dec., 2018 | Hire purchase interest | 18,000 | 31st Dec., 2019 | Hire purchase interest | 12,000 |
| 31st Dec., 2020 | Hire purchase interest | 6,000 |
| Date | Details | Amount |
|---|---|---|
| 2018 | Hire purchaser | 200,000 |
| 2019 | Hire purchaser | 100,000 |
| 2020 | Hire purchaser | - |
| Date | Details | Amount (Dr) | Date | Details | Amount (Cr) |
|---|---|---|---|---|---|
| 01st Jan., 2018 | Hire purchase sales | 500,000 | 01st Jan., 2018 | Hire purchase interest suspense | 36,000 |
| 01st Jan., 2018 | Balance b/d | 536,000 | 31st Dec., 2018 | Bank (down payment) | 200,000 |
| 31st Dec., 2018 | Hire purchase interest suspense | 18,000 | 31st Dec., 2018 | Bank (1st instalment) | 118,000 |
| 31st Dec., 2018 | Balance c/d | 218,000 | 31st Dec., 2019 | Bank (2nd instalment) | 218,000 |
| 01st Jan., 2019 | Balance b/d | 218,000 | 31st Dec., 2019 | Balance c/d | 536,000 |
| 31st Dec., 2019 | Hire purchase interest suspense | 36,000 | 31st Dec., 2020 | Bank (3rd instalment) | 112,000 |
| 01st Jan., 2020 | Balance b/d | 536,000 | 31st Dec., 2020 | Balance c/d | 106,000 |
| Date | Details | Amount (Dr) | Date | Details | Amount (Cr) |
|---|---|---|---|---|---|
| 31st Dec., 2018 | Hire purchase interest | 18,000 | 31st Dec., 2018 | Balance c/d | 18,000 |
| 31st Dec., 2019 | Hire purchase interest | 36,000 | 31st Dec., 2019 | Balance c/d | 12,000 |
| 31st Dec., 2020 | Hire purchase interest | 18,000 | 31st Dec., 2020 | Balance c/d | 6,000 |
| 01st Jan., 2018 | HIRESHI Co. Ltd. | 36,000 | 01st Jan., 2019 | Balance b/d | 36,000 |
| 01st Jan., 2019 | Balance b/d | 18,000 | 01st Jan., 2020 | Balance b/d | 18,000 |
| 01st Jan., 2020 | Balance b/d | 6,000 |
| Date | Details | Amount (Dr) | Date | Details | Amount (Cr) |
|---|---|---|---|---|---|
| 31st Dec., 2018 | Profit or loss | 18,000 | 31st Dec., 2018 | Hire purchase interest suspense | 18,000 |
| 31st Dec., 2019 | Profit or loss | 12,000 | 31st Dec., 2019 | Hire purchase interest suspense | 12,000 |
| 31st Dec., 2020 | Profit or loss | 6,000 | 31st Dec., 2020 | Hire purchase interest suspense | 6,000 |
| Date | Details | Amount (TZS) |
|---|---|---|
| 2018 | HIRESHI Company Ltd. | 218,000 |
| 2018 | Less: Hire purchase interest suspense | (18,000) |
| 2019 | HIRESHI Company Ltd. | 106,000 |
| 2019 | Less: Hire purchase interest suspense | (6,000) |
| 2020 | HIRESHI Company Ltd. | 200,000 |
| 2020 | Less: Hire purchase interest suspense | (100,000) |
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