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Purchase and Sales System Study

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					                          HIRE PURCHASE AND INSTALMENT PURCHASE SYSTEM
Important Term :
    1. Hire Vendor : The person who sells the goods under a hire purchase agreement is called a hire vendor.
    2. Hirer / Hire purchaser : The buyer of goods under a hire purchase agreement is called a hirer or hire
         purchaser
    3. Cash Price : Cash price is the price of the asset or total amount to be paid on purchase of goods in cash .
         The Cash price does not include any interest or hire charges.
    4. Down Payment : Down payment is the amount of initial payment by a hirer at the time of signing an
         agreement and taking delivery of the goods under a hire purchase agreement.
    5. Instalment : Instalment is the amount which is payable at periodical intervals. It includes both principal
         and interest.
    6. Hire purchase price : It is the total of down payment and all the instalments including interest paid by the
         hirer to the vendor.
                                                Hire Purchase System :
Accounting Entries in the books of Hirer :
    1. When an asset is purchased on HP system
                   Asset A/c.                       Dr.             [ with cash price ]
                            To, Hire Vendor A/c.
    2. For cash down payment on delivery
                   Hire Vendor A/c.                 Dr.
                            To, Cash/Bank A/c.
    3. For interest due at the end of the year
                   Interest A/c.                    Dr.
                            To, Hire Vendor A/c.
    4. For the payment of the first instalment
                   Hire Vendor A/c.                 Dr.             [ with interest ]
                            To, Bank A/c.
    5. For depreciation charge
                   Depreciation A/c.                Dr.
                            To, Asset A/c.
    6. For transfer of interest & depreciation to P/L A/c.
                   Profit & Loss A/c.               Dr.
                            To, Interest A/c.
                            To, Depreciation A/c.
Entries (3) , (4), (5), & (6) will be repeated in subsequent years.
Accounting Entries in the books of Vendor :
    1. When goods are sold on hire purchase system
                   Hirer A/c.                       Dr.
                            To, Hire sales A/c.
    2. For cash received on delivery
    `              Cash/ Bank A/c.                  Dr.
                            To, Hirer A/c.
    3. For interest due on instalment at the end of the year
                   Hirer A/c.                       Dr.
                            To, Interest A/c.
    4. For receipt of the amount of instalment
                   Cash/ Bank A/c.                  Dr.
                            To, Hirer A/c.
    5. For transfer of interest to P/L A/c.
                   Interest A/c.                    Dr.
                            To, Profit & Loss A/c.
Entries (3), (4) & (5) will be repeated in subsequent years.
The following accounts are opened in the books of the Hirer
    1. Hire Vendor Account ( By name )
    2. Asset Account (By name )
    3. Interest Account
    4. Depreciation Account
    5. Profit & Loss Account
The following accounts are opened in the books of the Vendor
    1. Hirer Account ( By name )
    2. Interest Account
    3. Profit & Loss Account
INSTALMENT PURCHASE SYSTEM
Accounting Entries in the books of Hirer :
    7. When an asset is purchased on Instalment purchase system
                   Asset A/c.                       Dr.             [ with cash price ]
                   Interest Suspense A/c.           Dr.             [ With interest for all years]
                            To, Hire Vendor A/c.
    8. For cash down payment on delivery
                   Hire Vendor A/c.                 Dr.
                            To, Cash/Bank A/c.
    9. For interest due at the end of the year
                   Interest A/c.                    Dr.
                            To, Interest Suspense A/c.
    10. For the payment of the first instalment
                   Hire Vendor A/c.                 Dr.             [ with interest ]
                            To, Bank A/c.
    11. For depreciation charge
                   Depreciation A/c.                Dr.
                            To, Asset A/c.
    12. For transfer of interest & depreciation to P/L A/c.
                   Profit & Loss A/c.               Dr.
                            To, Interest A/c.
                            To, Depreciation A/c.
Entries (3) , (4), (5), & (6) will be repeated in subsequent years.
Accounting Entries in the books of Vendor :
    6. When goods are sold on instalment purchase system
                   Hirer A/c.                       Dr.
                            To, Hire sales A/c.                     [ Cash price ]
                            To, Interest suspense A/c.              [ interest for all years ]
    7. For cash received on delivery
    `              Cash/ Bank A/c.                  Dr.
                            To, Hirer A/c.
    8. For interest due on instalment at the end of the year
                   Interest Suspense A/c.           Dr.
                            To, Interest A/c.
    9. For receipt of the amount of instalment
                   Cash/ Bank A/c.                  Dr.
                            To, Hirer A/c.
    10. For transfer of interest to P/L A/c.
                   Interest A/c.                    Dr.
                            To, Profit & Loss A/c.
Entries (3), (4) & (5) will be repeated in subsequent years.
The following accounts are opened in the books of the Hirer
    1. Hire Vendor Account ( By name )
    2. Asset Account (By name )
    3. Interest Suspense Account
    4. Interest Account
    5. Depreciation Account
    6. Profit & Loss Account
The following accounts are opened in the books of the Vendor
    1. Hirer Account ( By name )
    2. Interest Suspense Account
    3. Interest Account
    4. Profit & Loss Account
                                             ***********************
1. X purchased a Machine on Hire purchase system. The total cash price of the machine is Rs.31,960,
    payable Rs.8000 down, and three instalments of Rs.12,000, Rs.10,000 and Rs.4,000 payable at the end of
    the first , second and third year respectively. Interest is charged at 5% p.a. Charge depreciation at 10% on
    straight line method. Prepare ledger accounts in the books of X.
    [ interest : 1198, 658, 184, dep.: 3196 p.a., Asset balance : 25,568 ]
2. On 1st January, 1991 Sharma purchased a machine from Kumar on Hire purchase basis. The particulars are
    as follows :
         (i)       Cash price Rs.10,000
         (ii)      Rs.4,000 to be paid on signing the contract
         (iii)     Balance in three instalments of Rs.2,000 plus interest
         (iv)      Interest charged on outstanding balance at 5%
         (v)       Depreciation at 10% p.a. written down value method , Prepare ledger accounts
3. On 1.1.1998, Mr. Das purchase a van on hire purchase basis from Tezpur Automobiles.
   The total amount payable being Rs.2,13,500. Payment was to be made Rs.60,000 on that day
    and the balance in three half yearly instalments of Rs.57,000, Rs.54,500 and Rs.42,000 commencing from
    30th June 1998. The vendor charged interest at 10% p.a.. Mr. Das close his books annually on 30th June
    and provides dep. @ 10% p.a. on reducing balance method. Determine the cash price of the machine and
    show the relevant ledger accounts in the books of Mr. Das and the Balance Sheet on 30.6.1998. [ 2002 ]
4. On Motor cycle is purchased on hire purchase system. The term of payment is four annual instalments of
    Rs.16,920 at the end of each year. The rate of interest charged is 5% p.a. Calculate the cash price of the
    Motor cycle.                                                                         [ 59,997 ]
5. On 1st January, 2002 Assam Trade purchased a machine from Das & Co. on hire purchased system. As per
    the agreement Rs. 20,000 is to be paid on delivery and the balance in three instalments of Rs. 24,000 each
    payable annually on 31st Dec. The cash price of the Machine was Rs. 80,000. Calculate the amount of
    interest charged each year.                                                   [6,000;4,000;2,000]
6. Mr. A Purchased a machine by the Hire Purchase System for Rs. 30,000 to be paid as follows:
                                                                  Rs.
               Down Payment                                    5,000
               At the end of 1st year                          7,000
               At the end of 2nd year                          6,500
               At the end of 3rd year                          6,000
               At the end of 4th year                          5,500
                       Interest is charged on the cash value at 10% p.a. At what value should the machine be
    capitalized? Give ledgers in the books of hirer.                                             [25,000 ]
7. Mr.Das purchased a Plant on hire purchase system paying Rs.15,000 down and Rs.15,000 at the end of
    three successive years. The rate of interest charged by the vendor is 5% p.a. Given the present value of an
    annuity of Rs.1 per annum @ 5% for 3 years is Rs.2.7232. Calculate cash price and interest to be charged
    each year.                                                                                   [ 55,848 ]
8. Om prakash of Rangapara purchased machinery from Machine Tools Limited , on the instalment system
    on 1st April, 1995, payment being made Rs. 597000 down and Rs.600000 annually for three years. The
    instalments were to be paid on 31st March each year. The cash price of Machinery was Rs.1860000.
    Machine Tools Limited charges interest @ 15% p.a. Om Prakash provide depreciation @ 15% on the
    diminishing value. The books of accounts were closed on 31st March every year. Pass journal entries for
    all the transactions and show the Machine Tools Limited Account in the books of Om Prakash.
9. On 1st march 1993, Hindustan Co. purchased a machine worth Rs. 45000 on hire purchase system An
    amount of Rs. 6000 was paid on delivery and the balance in 5 instalments of Rs. 9000 each payable
    annually on 1st march every year. Any difference in the fifth year’s amount should be suitably adjusted on
    yearly balance. Prepare ledger accounts in the books of Hindustan Company for 5 years providing
    depreciation at 20% on diminishing balance.
10. Meleng Company purchased from M/s Bhargab Hire Purchase Company, a Motor van on 1st April 1996,
    the cash price being Rs.164000. The purchase was on hire purchase basis, Rs. 50000 being paid on the
    signing the agreement, and, thereafter, Rs. 50000 being paid annually on 31st March for three years.
    Interest was charged at 15% per annum. Depreciation was written off at the rate of 25% per annum on the
    diminishing balance method. Meleng Company closes its books every year on 31st March.                Prepare
    the necessary ledger accounts in the books of Meleng Company.
11. On 1-1-95, Assam traders purchased a machine on hire purchase system from M/S ZED &Company. As
    per agreement, an amount of rs.5000 was to be paid on signing the agreement and the balance in three
    instalments of Rs.20000 each payable annually on 31st December each year. The vendor company charged
    5% interest per annum on yearly balance. Ascertain the price of the machine and show .1.Machine
      account 2.M/S Zed & Co A/c in the books of the hire purchaser for three years providing depreciation
      @15% p.a. on the diminishing balance. The books of accounts were closed on 31st December each year.
12.   On 1st January 2000 X delivered to Y a Machine on H.P.System, Rs.5,000 being paid on delivery and the
      balance in three instalments of Rs.6,000 each , payable annually on 31st December. The cash price of the
      machine was Rs.20,000. Give ledger in the books of X and Y.
13.   On 1st January, 1990 Ispat company purchased machinery worth Rs. 45000 on hire purchase system. An
      amount of Rs. 6000 was paid on delivery and the balance in 5 instalments of Rs. 9000 each payable
      annually on 1st January every year. Any difference in the fifth year’s amount should be suitably adjusted
      on yearly balance. Prepare ledger accounts in the books of Ispat company limited for 5 years providing
      depreciation at 20% on diminishing balance. 96M
14.   Ram purchased a Van for Rs.42,000. Payment is made as Rs.10,000 down and four instalments of
      Rs.10,000 each at the end of each year. Interest is charged at 10% per annum. Buyer depreciates the van at
      10% per annum on written down value method.
            Ram after having paid the down payment and first instalment at the end of first year, could not pay
      the second instalmet and the hire vendor took possession of the van. The hire vendor after spending
      Rs.1,280 on repairs of the van, sold it for Rs.31,000.
           Give ledgers in the books of both the parties.
15.   P purchased 4 Cars of Rs.14,000 each by the Hire purchase system. The hire purchase price for all the 4
      cars was Rs.60,000 to be paid as Rs.15,000 down payment and three installments of Rs.15,000 each at the
      end of each year. Interest is charged at 5% per annum. Buyer depreciated cars at 10% per annum on the
      straight line method.
            After having paid the down payment and the first installment, the buyer could not pay the second
      instalment and the seller took possession of three cars at an agreed value to be calculated after depreciating
      cars at 20% per annum on written down value method. One car was left with the buyer.Seller after
      spending Rs.1,200 on repairs, sold all the 3 cars to X for Rs.35,000. Give ledgers in the books of hirer and
      vendor.
16.   The Moped Ltd. sold a moped on instalment system to Kanta Ltd. of Cuba. The cash price was
      Rs.7450. Rs.2000 was to be paid on delivery and the balance in three instalments of Rs.2000 each at the
      end of each year. The Moped Ltd. charges interest @ 5% p.a. Write up the journal entries in the books of
      the buyer, and also prepare the Moped Ltd. account. Buyer depreciates the asset at 10% p.a. under
      reducing instalment basis.
17.   On 1.1.96, Amal sells a truck to Bimal on the instalment system on the following terms and conditions.
      i.       The purchase price of the truck is Rs.1,00,000
      ii.      The amount is payable to Amal in four equal annual instalments along with 12% interest p.a. on
               the outstanding balance, the first instalment being payable on the date of sale.
      Bimal in turn hires out the truck to Amal for a monthly sum of Rs.3000 per month from1.1.96. The hire
      charges are to be adjusted at the end of each year against the amount due to Amal on account of principal
      and interest, any difference being settled in cash. Bimal charges 20% depreciation (on w.d.v.method) on
      the truck. All payments are made as per the agreement. On 1st Jan 1999, the truck is sold by Bimal to
      Amal for Rs.15,000 cash. Show in Bimal books, the Truck Account, the interest suspense account, the hire
      charges account, the interest account and Amal’s account.
18.   On 1st January 1990, Assam Oil Company purchased an oil machine on instalment system. The cash price
      of the machine was Rs.11175 and payment was to be made as following Rs.3000 each at the end of each
      year.5% interest is to be charged by Archana Machinery Company per annum. Assam Oil Company has
      decided to write off 10% annually on diminishing balance of the cash price. Give the journal entries and
      ledger accounts in the books of Assam Oil Company. Calculations are to be made to the nearest rupee.
19.   On 1st January 1992 M/s Barua Traders purchases a car on instalment purchase system. An amount of
      Rs.9000 was to be paid on signing of the agreement and the balance was payable in five instalments of Rs.
      13500 each on 1st January each year. Interest was charged by the vendor at 5% per annum on yearly basis.
      Depreciation was provided @10% per annum on the reducing balance method. Show 1. Barua Traders
      account, 2. Interest suspense account, 3.Interest account in the books of the vendor for the period till the
      payment of final instalment assuring that books were closed on 31st December each year.
20.   January 1999, Amal purchases a machine from Bimal & Co. on instalment payment system at 10 % per
      annum interest which is yearly chargeable. Amal agrees to pay Rs. 2,00,000 on January1,1999.
      Rs.1,21,000 on December 31,2001; Rs. 1,33,100 on December 31,2001; and finally Rs.1,46,400 on
      December 31,2002. Amal duly paid the instalments. Prepare a machinery account, Bimal & Co. Account
      and interest suspense account in the books of Amal. Assuming that Amal provides for depreciation @
      20% p.a. on diminishing balance method at the accounting date 31st December each year.
                                       ***************************

				
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