Repossessions of Assets

Rights of the hire vendor to terminate hire purchase agreement occurs when the hirer makes more than one default in payment of instalment as provided in the agreement. In that case, the hire vendor shall be entitled to terminate the agreement by giving notice of termination in writing. Where a hire purchase agreement is terminated, the hire vendor has the right to:

1. Enter the premises of the hirer and seize the goods;
2. Retain the hire charges already paid and to recover the arrears of hire charges due; and
3. Claim compensations for non delivery of the goods.

Where the owner seizes the goods lent under a hire purchase agreement, the hirer may recover from the owner the amount, if any, by which the amounts paid in respect of the hire purchase price up to the date of seizure is higher than the value of the goods on the date of seizure. And, where goods have been sold on hire purchase agreement, and the legal amount of hire purchase price has been paid in full, the vendor shall not be allowed to repossess the goods from the hirer, unless by verdict of the court.

When the purchaser fails to pay any instalments, the hire vendor has the right to take back the possession of the goods. The amount already paid to the vendor as a part of the payment for the asset is treated as the hiring charge. In making repossession of goods, the vendor can either take back the whole asset (complete possession) or just a part of it (partial possession). The accounting entries in these two scenarios will be passed on the basis of either complete repossession or partial repossession.

The hire purchaser closes the hire vendor's account by transferring the balance of hire vendor account to hire purchase asset and then finding the profit or loss on repossession. After repossession, the vendor may incur expenses on repossessed stock and may sell them again. The accounting entries are as follows:

On 1st January, 2020, KARUME Ltd. sold a used tractor for TZS 28,000,000 (cash price) to SHAMNBANI WINNERS on hire purchase. Payment was to be made as TZS 7,500,000 cash down payment and three equal instalments of TZS 7,500,000 at the end of each year. Rate of interest was 5% per annum. The rate of depreciation for the asset was 10% per annum on reducing balance method. SHAMBAN WINNERS made the down payment and managed to pay the first instalment at the end of the year 2020, but could not pay the second instalment. Consequently, KARUME Ltd. repossessed the tractor. KARUME Ltd. spent TZS 300,000 on repairs and disposal of the tractor for TZS 15,350,000.

Required:

Prepare the necessary ledger accounts in the books of the seller and the buyer.