# Hire Purchase and Instalment Sale Transactions – CA Inter Accounts Study Material

Hire Purchase and Instalment Sale Transactions – CA Inter Accounting Study Material is designed strictly as per the latest syllabus and exam pattern.

## Hire Purchase and Instalment Sale Transactions – CA Inter Accounts Study Material

Theory Questions

Question 1.
What are the differences between Hire Purchase and Instalment System? (4 marks) (Nov. 2014)
Differences between Hire Purchase and Instalment System

Question 2.
Distinguish between Hire Purchase System and Instalment system. (4 marks) (May 2017)
Differences between Hire Purchase and Instalment System

Question 3.
Explain the special features of hire purchase agreement. (4 marks) (Nov. 2017)
Special features of Hire Purchase Agreement

1. Possession:
The hire vendor transfers possession of the goods to the hire purchaser immediately after the contract for hire purchase is made.
2. Instalments:
The goods are delivered by the hire vendor on the condition that a hire purchaser should pay the amount in periodical instalments.
3. Down Payment:
The hire purchaser generally makes a down payment i.e. an amount on signing the agreement.
4. Constituents of Hire purchase instalments:
Each instalment consists partly of a finance charge (interest) and partly of a capital payment.
5. Ownership:
The property in goods is to pass to the hire purchaser on the payment of the last instalment and exercising the option conferred upon him under the agreement.
6. Repossession:
In case of default in respect of payment of even the last instalment, the hire vendor has the right to take the goods back without making any compensation.

Computation Of Interest; Cash Retail Price

Question 4.
On 1st April, 2009 a car company sold to Arya Bros., a motor car on hire-purchase basis. The total hire-purchase price was ₹ 4,60,000 with down payment of ₹ 1,60,000. Balance amount was to be paid in three annual instalments of ₹ 1,00,000 each. The first instalment payable on 31st March, 2010. The cash price of the car was ₹ 4,00,000.
How will Arya Bros, account for interest over three accounting years assuming books of account are closed on 31st March every year? (2 Marks) {May 2010)
Total interest on hire purchase transactions = ₹ 4,60,000 – ₹ 4,00,000 = ₹ 60,000
As balance payment is made in three equal instalments, so interest is to be allocated in the ratio of 3:2:1
Therefore, interest for 1st year = ₹ 60,000 × $$\frac{3}{6}$$ = ₹ 30,000
find year = ₹ 60,000 × $$\frac{2}{6}$$ = ₹ 20,000
Bird year = ₹ 60,000 × $$\frac{1}{6}$$ = ₹ 10,000

Question 5.
G Ltd, acquired a delivery van on hire purchase on 01.04.2014 from Gab a Enterprises. The terms were as follows:

Cash price of van ₹ 1,50,000 and depreciation is charged at 10% WDV.
You are required to calculate Total Interest and Interest included in each instalment (RTP)
Calculation of total Interest and Interest included in each instalment Hire Purchase Price (HPP) = Down Payment + instalments = 30,000 + 50,000 + 50,000 + 30,000 + 20,000 = 1,80,000
Total Interest = 1,80,000 – 1,50,000 = 30,000

Computation of Ratio of HPP

Ratio of outstanding HPP at beginning for each year = 15 : 10 : 5 : 2
Total Interest is of ₹ 30,000

Question 6.
(i) From the following, calculate the cash price of the asset:

(ii) On 1st April, 2009 a car company sold to Arya Bros., a motor car on hire-purchase basis. The total hire-purchase price was ₹ 4,60,000 with down payment of ₹ 1,60,000. Balance amount was to be paid in three annual instalments of ₹ 1,00,000 each. The first instalment payable on 31st March, 2010. The cash price of the car was ₹ 4,00,000.
How will Arya Bros, account for interest over three accounting years assuming books of account are closed on 31st March every year? (2 × 2 = 4 Marks) (May 2010)
(i) Computation of cash price of the asset

Cash price of the asset = Down payment + ₹ 35,459
= ₹ 10,000 + ₹ 35,459
= ₹ 45,459

(ii) Total interest on hire purchase transactions = ₹ 4,60,000 – ₹ 4,00,000 = ₹ 60,000
As balance payment is made in three equal instalments, so interest is to be allocated in the ratio of 3 : 2 : 1
Therefore, interest for 1st year = ₹ 60,000 × $$\frac{3}{6}$$ = ₹ 30,000
IInd year = ₹ 60,000 × $$\frac{2}{6}$$ = ₹ 20,000
IIIrd year = ₹ 60,000 × $$\frac{1}{6}$$ = ₹ 10,000

Question 7.
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 Question No. 1 is compulsory Candidates are also required to answer any five questions from the remaining six questions. Wherever necessary suitable assumptions may be made and disclosed by way of a note. Working Notes should form part of the answer. (5 Marks) (Nov. 2012)
Ratio of interest and amount due $$=\frac{\text { Rate of interest }}{100+\text { Rate of interest }}$$ = $$\frac{10}{110}$$ = 1/11
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:
Computation of Interest and Cash Price

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.

Problems Without Repossession

Question 8.
Happy Valley Florists Ltd. acquired a delivery van on hire purchase on 01.04.2010 from Ganesh Enterprises. The terms were as follows:

Cash price of van ₹ 1,50,000 and depreciation is charged at 10% WDV.

You are required to:

1. Calculate Total Interest and Interest included in each instalment
2. Prepare Van A/c., Ganesh Enterprises A/c. in the books of Happy Valley Florists Ltd. up to 31.03.2014. (8 Marks) (May 2014)

Computation of total Interest and Interest included in each instalment
Hire Purchase Price (HPP) = Down Payment + instalments
= 30,000 + 50,000 + 50,000 + 30,000 + 20,000
= 1,80,000
Total Interest = 1,80,000 – 1,50,000 = 30,000

Calculation of Ratio of HPP in beginning of each year

1. Ratio of outstanding HPP at beginning for each year = 15 : 10 : 5 : 2 Total Interest is of ₹ 30,000

Books of Happy Valley Florist Ltd. Van A/c

Ganesh Enterprises A/c

Question 9.
M/s. Kodam Enterprises purchased a generator on hire purchase from M/s. Sanctum Ltd. on 1st April, 2017. The hire purchase price was ₹ 48,000. Down payment was ₹ 12,000 and the balance is payable in 3 annual instalments
of ₹ 12,000 each payable at the end of each financial year. Interest is payable @ 8% p.a. and is included in the annual payment of ₹ 12,000.
Depreciation at 10% p.a. is to be written of using the straight -line method.
You are required to:

(i) calculate the cash price of the generator and the interest paid on each instalment.
(ii) pass relevant journal entries in the books of M/s. Kodam Enterprises from 1 st April, 2017 to 31 st March, 2018 following the interest suspense method. (8 Marks) (May 2018)

(i) Computation of Interest and Cash Price
Ratio of interest and amount due = 8/(100 + rate of interest) Le. 8/108
To ascertain cash price, interest will be calculated from last instalment to first instalment as follows:

Total cash price = ₹ 30,925 + 12,000 (down payment) = ₹ 42,925

Working Notes:

1. ₹ 11,111 + 2nd instalment of ₹ 12,000 = ₹ 23,111
2. ₹ 21,399 + 1st instalment of ₹ 12,000 = ₹ 33,399

(ii) Journal Entries
Books of M/s Kodam Enterprises

Problems With Repossession

Question 10.
The following particulars relate to hire purchase transactions:
(a) X purchased three cars from Y on hire purchase basis, the cash price of each car being ₹ 2,00,000.
(b) The hire purchaser charged depreciation @ 20% on diminishing balance method.
(c) Two cars were seized by on hire vendor when second instalment was not paid at the end of the second year. The hire vendor valued the two cars at cash price less 30% depreciation charged under it diminishing balance method.
(d) The hire vendor spent ₹ 10,000 on repairs of the cars and then sold them for a total amount of ₹ 1,70,000.
You are required to compute:

(i) Agreed value of two cars taken back by the hire vendor.
(ii) Book value of car left with the hire purchaser.
(iii) Profit or loss to hire purchaser on two cars taken back by the hire vendor.
(iv) Profit or loss of cars repossessed, when sold by the hire vendor. (RTP)

Question 11.
On 1st April, 2012, M/s. Power Motors sold on hire purchase basis a truck whose cash price was ₹ 9,00,000 to M/s. Singh & Singh, a transport firm. The terms of the contract were that the transporters were to pay ₹ 3,00,000 down and six four-monthly instalments of ₹ 1,00,000 plus interest on outstanding amount of cash price for the intervening four months. The instalments were payable on 31st July, 30th November and 31st March in each one of the two accounting years. Interest was calculated @ 12% per annum.

M/s. Singh & Singh duly paid the instalment on 31st July, 2012 but failed to pay the instalment on 30th November, 2012. M/s. Power Motors, after legal formalities, repossessed the truck valuing it at ₹ 7,00,000.
M/s. Power Motors spent ₹ 80,000 on repairs and repainting of the truck and on 7th January, 2013 sold it for ₹ 7,50,000 cash.

You are required to prepare M/s. Singh & Singh’s A/c and Goods Repossessed Account in the books of M/s. Power Motors. (6 Marks) (May 2013)
In the books of M/s. Power Motors M/s. Singh & Singh’s A/c

Goods Repossessed A/c

Question 12.
Lucky bought 2 tractors from Happy on 1-10-2011 on the following terms:

Lucky provides depreciation @ 20% on the diminishing balances.

On 30-9-2014 Lucky failed to pay the 3rd instalment upon which Happy repossessed 1 tractor. Happy agreed to leave one tractor with Lucky and adjusted the value of the tractor against the amount due. The tractor taken over was valued on the basis of 30% depreciation annually on written down basis. The balance amount remaining in the vendor’s account after the above adjustment was paid by Lucky after 3 months with interest @ 18% p.a.
You are required to:

1. Calculate the cash price of the tractors and the interest paid with each instalment.
2. Prepare Tractor Account and Happy Account in the books of Lucky assuming that books are closed on September 30 every year. Figures may be rounded off to the nearest rupee. (8 Marks) (May 2015)

Computation of Interest and Cash Price

Total cash price = ₹ 6,50,000 + 5,00,000 (down payment) = ₹ 11,50,000.

Books of Lucky Tractor A/c

Happy A/c

Question 13.
Girish Transport Ltd. purchased from NCR Motors 3 electric rickshaws costing ₹ 60,000 each on the hire purchase system on 01.01.2013. Payment was to be made ₹ 30,000 down and the remainder in 3 equal instalments payable on 31.12.2013, 31.12.2014 and 31.12.2015 together with interest @ 10% p.a. Girish Transport Ltd. writes off depreciation @ 20% p.a. on the reducing balance. It paid the instalment due at the end of 1st year i.e. 31.12.2013 but could not pay next on 31.12.2014. NCR Motors agreed to leave one e-rickshaw with the purchaser on 31.12.2014 adjusting the value of the other two e-rickshaws against the amount due on 31.12.2014. The e-rickshaws were valued on the basis of 30% depreciation annually on WDV basis.

Show the necessary Ledger accounts in the books of Girish Transport Ltd. for the years 2013, 2014, and 2015. (8 Marks) (May 2016)
Books of Girish Transport Ltd.
E-Rickshaw A/c

NCR Motors A/c

Note:
In the absence of any information it has been assumed that the balance payment amounting ₹ 56,320 had not been made till 31st Dec. 2015.

Question 14.
Srikumar bought 2 cars from ‘Fair Value Motors Pvt. Ltd’, on 1.4.2012 on the following terms:
Down payment – 6,00,000
1st Instalment at the end of first year – 4,20,000
2nd Instalment at the end of 2nd year – 4,90,000
3rd Instalment at the end of 3rd year – 5,50,000
Interest is charged at 10% p.a.
Srikumar provides depreciation @ 25% on the diminishing balances.

On 31.3.2015 Srikumar failed to pay the 3rd instalment upon which ‘Fair Value Motors Pvt. Ltd.’ repossessed 1 car. Srikumar agreed to leave one car with Fair Value Motors Pvt. Ltd. and adjusted the value of the car against the amount due. The car taken over was valued on the basis of 40% depreciation annually on written down basis. The balance amount remaining in the vendor’s account after the above adjustment was paid by Srikumar after 3 months with interest @ 20% p.a.

You are required to:

(i) Calculate the cash price of the cars and the interest paid with each instalment.
(ii) Prepare Car Account and Fair Value Motors Pvt. Ltd. Account in the books of Srikumar assuming books are closed on March 31, every year. Figures may be rounded off to the nearest rupee. (8 Marks) (Nov. 2016)