Hire Purchase and Installment

11 Sale Transactions

BASIC CONCEPTS

Hire Purchase Under Hire Purchase System, hire purchaser will pay cost of
Accounting purchased asset in installments. The ownership of the goods will
be transferred by the Hire Vendor only after payment of
outstanding balance.
Under installment system, ownership of the goods is transferred
by owner on the date of delivery of goods.
Accounting Methods under Hire Purchase System
Cash price Method
Interest suspense Method

Question 1
A acquired on 1st January, 2011 a machine under a Hire-Purchase agreement which provides for 5
half-yearly instalments of ` 6,000 each, the first instalment being due on 1st July, 2011. Assuming
that the applicable rate of interest is 10 per cent per annum, calculate the cash value of the
machine. All working should form part of the answer.
Answer

Statement showing cash value of the machine acquired on hire-purchase basis

Instalment Interest @ 5% half yearly Principal Amount

Amount (10% p.a.) = 5/105 = 1/21) (in each instalment)
(in each instalment)
` ` `
5th Instalment 6,000 286 5,714
Less: Interest (286)
5,714

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 11.2 Accounting

Add: 4th Instalment 6,000

11,714 558 5,442
Less: Interest (558) (11,1565,714)
11,156
Add: 3rd instalment 6,000
17,156 817 5,183
Less: Interest (817) (16,33911,156)
16,339
Add: 2nd instalment 6,000
22,339 1,063 4,937
Less: Interest (1,063) (21,27616,339)
21,276
Add: 1st instalment 6,000
27,276 1,299 4,701
Less: Interest (1,299) (25,97721,276)
25,977 4,023 25,977

The cash purchase price of machinery is ` 25,977.

Question 2
On 1st April, 2012, Fastrack Motors Co. sells a truck on hire purchase basis to Teja Transport
Co. for a total hire purchase price of ` 9,00,000 payable as to ` 2,40,000 as down payment
and the balance in three equal annual instalments of ` 2,20,000 each payable on 31st March
2013, 2014 and 2015.
The hire vendor charges interest @ 10% per annum.
You are required to ascertain the cash price of the truck for Teja Transport Co. Calculations
may be made to the nearest rupee.
Answer
Rate of int erest 10
Ratio of interest and amount due = = = 1
100 + Rate of int erest 110 11

There is no interest element in the down payment as it is paid on the date of the transaction.
Instalments paid after certain period includes interest portion also. Therefore, to ascertain
cash price, interest will be calculated from last instalment to first instalment as follows:
Calculation of Interest and Cash Price
No. of Amount due at the time Interest Cumulative

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 Hire Purchase and Installment Sale Transactions 11.3

instalments of instalment Cash price

[1] [2] [3] (2-3) = [4]
3rd 2,20,000 1/11 of ` 2,20,000 =` 20,000 2,00,000
2nd 4,20,000 [W.N.1] 1/11 of ` 4,20,000= ` 38,182 3,81,818
1st 6,01,818 [W.N.2] 1/11of ` 6,01,818= ` 54,711 5,47,107
Total cash price = ` 5,47,107+ 2,40,000 (down payment) =` 7,87,107.
Working Notes:
1. ` 2,00,000+ 2nd instalment of ` 2,20,000= ` 4,20,000.
2. ` 3,81,818+ 1st instalment of ` 2,20,000= ` 6,01,818.

The Institute of Chartered Accountants of India