Accounting for Hire Purchase by bxd16948


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A motor vehicle was bought from General Motors Ltd. on January 1,1999 under a hire purchase
agreement. The cash price was $200,000. Hire Purchase price was $230,000. The agreement calls
for the payment of annual instalments at the end of 1999 & 2000. Each instalment to be $100,000
plus interest accrued for that year, i.e., the reducing balance method. Annual payments for 1999 &
2000 should be $120,000 & $100,000 respectively. Rate of interest is 10% per annum.


Prepare the appropriate accounts in the books of the General Motors Ltd. to record the above
transactions for the years 1999 & 2000.


On January 1,19x1, BM Ltd. acquired a lorry from VM Motors Ltd. under a hire purchase
agreement. The cash price of the lorry is $15,000. The hire purchase price is $18,000. The
agreement calls for three equal payments of $6,000 to be made on 31 December each year. Interest
on the contract is 9.7%.


Prepare the appropriate accounts in the books of the BM Ltd. to record the above transactions for
the years 19x1, 19x2, and 19x3.


An engineering concern purchased machines on the H.P. system over a period of three years
paying $846 down on 1 January 19-3, and further annual payments of $2,000 due on 31 December
19-3, 19-4, and 19-5.

The cash price of the machine was $6,000, the vendor company charging interest at 8% per annum
on outstanding balances. Depreciation at 10% per annum on the written down value is to be
charged and interest calculated to the nearest $.


a)     Show the appropriate ledger accounts in the purchaser’s books for the three years, and
b)     Show how the items would appear in the balance sheet at 31 December 19-3.


On 1 January 19-3 J. Donkins bought a machine (cash price $2,092) from CD & Co Ltd on the
following hire purchase terms. Donkins was to make an immediate payment of $600 and three
annual payments of $600 on 31 December in each year. The rate of interest chargeable is 10% per
annum. Donkins depreciates this machinery by 10% on the diminishing balance each year. All
calculations are to be made to the nearest $.


a)     Make the entries relating to this machine in Donkins Ledger for the year 19-3, 19-4, &19-5,
b)     Show how the item machinery would appear in the Balance Sheet as at 31 December 19-3.


Bulwell Aggregates Ltd. wish to expand their transport fleet and have purchased three heavy
lorries with a list price of $18,000 each. Bulwell has negotiated hire purchase finance to fund this
expansion, and the company has entered into a hire purchase agreement with Granby Garages PLC
on 1 January 19-1. The agreement states that Bulwell Aggregates will pay a deposit of $9,000 on 1
January 19-1 and two annual instalments of $24,000 on 31 December 19-1, 19-2, and a final
instalment of $20,391 on 31 December 19-3.

Interest is to be calculated at 25% on the balance outstanding on 1 January each year and paid on 1
December each year.

The depreciation policy of Bulwell Aggregates Ltd is to write off the vehicles over a four year
period using the straight line method and assuming a scrap value of $1,333 for each vehicle at the
end of its useful life.

The cost of the vehicles to Granby Garages is $14,400 each.

All calculations are to be made to the nearest $.


   a) Account for the above transactions in the books of Bulwell Aggregates Ltd. showing the
      entries in the Profit and Loss Account and Balance Sheet for the years 19-1, 19-2,19-3, and

   b) Account for the above transactions in the books of Granby Garage PLC, showing the
      entries in the Hire Purchase Trading Account for the years 19-1, 19-2, and19-3. This is the
      only hire purchase transaction undertaken by this company.

       * What is the GP % or unrealized profit margin?


J York was acquiring two cars under hire purchase agreements, details of which are as follows:

Registration Number                                 JY 1                  JY2
Date of purchase                                    31 May 19-6           31 Oct. 19-6
Cash Price                                          $18,000               $24,000
Deposit                                             $ 3,120               $ 4,800
Interest (deemed to accrue evenly over
The period of the agreement)                        $ 1,920               $ 2,400

Both agreements provided for payment to be made in twenty-four monthly instalments
commencing on the last day of the month following purchase.

On 1 September 19-7, vehicle JY1 became a total loss. In full settlement on 20 September 19-7:

a)     An insurance company paid $12,500 under a comprehensive policy, and
b)     The Hire purchase company accepted $6,000 for the termination of the agreement.

The firm prepared accounts annually to 31 December and provided depreciation on a straight line
basis at a rate of 20% per annum for motor vehicles, apportioned as from the date of purchase and
up to the date of disposal.

All instalments were paid on due dates.

The balance on the Hire Purchase Company Account in respect of vehicle JY1 is to be written off.


Record these transactions in the following accounts, carrying down the balances as on 31
December 19-6 and 31 December 19-7:
a)    Motor Vehicles,
b)    Depreciation,
c)    Hire Purchase Company, and
d)    Assets Disposal.


RJ commenced business on 1 January 19-8. He sells refrigerators, all of one standard type, on hire
purchase terms. The total amount, including interest, payable for each refrigerator, is $300.
Customers are required to pay an initial deposit of $60, followed by eight quarterly instalments of
$30 each. The cost of each refrigerator to RJ is $200.

The following trial balance was extracted from RJ’s books as on 31 December 19-8.

                                        TRIAL BALANCE
                                                     $                       $
Capital                                                                      100,000
Fixed Assets                                                   10,000
Drawings                                                        4,000
Bank overdraft                                                                19,600
Creditors                                                                     16,600
Purchases                                                     180,000
Cash collected from customers                                                 76,500
Bank interest                                                 400
Wages and salaries                                         12,800
General Expenses                                            5,500            ______
                                                         212,700             212,700
                                                         ======              ======
850 machines were sold on hire-purchase terms during 19-8.

The annual accounts are prepared on the basis of taking credit for profit (including interest) in
proportion to the cash collected from customers.


a)     The hire purchase trading account;
b)     The profit and loss account for the year 19-8
c)     The balance sheet as on 31 December 19-8

Ignore depreciation of fixed assets. Show your calculations.


Leisure Services Limited, Stoke-on Trent were electrical wholesalers. On 2 May 19x3, they
purchased on credit from TV Suppliers Limited ten television sets for $1,600. They offered these
for sale for cash at $240 each or on hire purchase for a cash deposit of $40 and eight quarterly
instalments of $30 each, the first instalment being payable after three months. In the week ended
16 May 19x3 they sold two sets for cash and four on HP terms for which the cash deposits were
paid at the time of sale.

On 1 December 19x3 Leisure Services Ltd installed one of their sets permanently on their own
premises in a closed circuit television installation to detect theft.


Prepare the necessary accounts (except cash and TV Suppliers Ltd) with dates and narrations in the
ledger of Leisure Services Ltd to record the above transactions, balance these accounts and prepare
a trading account up to 31 December 19x3.

Note: The amount of HP interest earned in the period, calculated on the sum of the digits method,
should be included in the trading account after sales.


Jock, a general transport operator, making his accounts up annually on 31 December, purchased
two vehicles on hire purchase. The details are as follows:

                                                      Vehicle A             Vehicle B
Date of purchase                                      1.7.19x0              1.4.19x1
Cash Price                                            $7,500                $10,000
Deposit paid at date of purchase                      $3,500                $ 4,000
Hire Purchase quarterly repayments – 8 @              $ 600                 $ 900

Vehicle A was sold for $4,000 cash on 1 October 19x2.

Depreciation is provided by means of the straight line method based on a five year life, a full year’s
depreciation being provided in the year of purchase but none in the year of sale. The charge for
interest is to be allocated using the sum of the digits method. The first monthly repayment is due
on the first day of the month of purchase.


a)     Show for each of the years ended 31 December 19x0, 19x1, 19x2, 19x3 the relevant entries
       as regards hire purchase and motor vehicles in the profit and loss account of Jock;
b)     The suggested drafting of the item motor vehicles as it might appear in the balance sheet.


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