ACCOUNTANCY FORM 6 – HIRE PURCHASE ACCOUNTING

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Accounting methods

Two alternative methods exist

METHOD A

Accounting entries

               with cash selling price

              with proportion of H.P interest when the installment is due

                     With deposit   + installments received

N.B

The balance on the H.P customer A/C at the end of the period, represents the cash sales price not yet due or received. Still at the end of the period, the following entries will be made.

   With cost of goods sold on hire purchase

   with transfer of balance on H.P sales and H.P interest received

        DR                     H.P   TRADING ACCOUNT                        CR

The provision for unrealized profit is raised to suspend the appropriate portion of the gross profit included in the selling price.

Formula: prov for unrealized profit =

                                                                   Or

                                   %, margin x balance on cash not yet due

Entry

Dr; H.P trading A/C

     CR; prov for unrealized profit A/C

This provision needs recalculations, and the difference between the opening and closing balance shall be transferred to the H.P Trading A/C

N.B

The balancing figure on the H.P trading A/C shall represent pure gross profit and H.P interest earned during the period.

And the balance on the H.P customer A/C (if any ) at the end of the period, will be include under current assets in the balance sheet as H.P customer yet due.

Method B. (HIRE PURCHASE SUSPENSE ACCOUNT)

1. DR H.P customer (debtor) A/C with the total H.P selling price.
   

        Cr H.P sales A/C with cash selling price
   

        Cr H.P interest suspense A/C with the total H.P interest
   

 

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with deposit   +   installment received

with release of the appropriate portion of H.P
              interest when the installments due.

N.B At the end of the period, the balance on the H.P customers A/C will represent H.P debtors owing but not yet due & shall be included under current assets in the balance sheet.

Still at the end of the period the following entries will be made.

  with transfer of balance on H.P sales + H.P interest received  to H.P Trading

         with cost of goods sold on hire purchase

    with the creation of the provision for unrealized profit

N.B

The balancing figure on the H.P Trading A/C shall represent pure gross profit and H.P interest earned during the period.

Example:

Bulwell aggregates ltd wish to expand their transport fleet and have purchases three heavy Lorries with a list price of Tshs 18000 each Robert Bulwell has negotiated hire purchase finance to fund this expansion, and the company has entered in a hire purchase agreement with grariby Garages Pluc 1 Jan 2001. The agreement states that Bulwell aggregates will pay a deposit of Tshs 9000 on 1 January 2001 and two annual installments of Tshs 24000 each on 31 Dec 2001, 2002 and a final installment of Tshs 20391, on 31 Dec 2003.

Interest is to be calculated at 25% on the balance outstanding on 1 Jan each year and paid on 31 Dec 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 shs1333 for each.

Required

1. Account for the above transaction in the books of Grariby Garages PLC, and showing the entries in the hire purchase trading account for the years 2001, 2002, 2003. This is the only hire purchase transaction and under taken by this company.
   

 

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Solution

 

 

          DR                                     SALE S ACCOUNT                              CR

DR   H.P TRADING ACCOUNT FOR YEAR ENDED 31.12.01  CR

 

DR        H.P TRADING ACCOUNT FIR THE YEAR ENDED 31.12.03   CR

DR   PROVISION FOR UNREALIZED PROFIT ACCOUNT     CR

DR       HIRE PURCHASE INTEREST RECEIVED ACCOUNT         CR

Calculation for provision for unrealized profit

EXERCISE

Songambele transport company ltd acquired 2 new 30 tone at calculated units on 1^st Jan 1990 for Tshs 258300, the vehicles were supplied and financed by Uvuruge ltd and the terms of H.P contract required a deposit of Tshs 60000 on delivery, followed by 3 installments on 31^st Dec 1990, 1991 and 1992 of Tshs 66000, 66000 and Tshs 66300.

Required

Prepaid their appropriate A/C in the books of Uvuruge ltd to record the above transaction for each of the tree years

Solution

Cash price                                                                                                180,000

Less: deposit                                                                                              60,000

                                                                                                                   120,000

Add: 1^st yr H.P interest (30/100 x 170000)                                             36,000

                                                                                                                     156,000

Deduct: 1^st H.P installment                                                                        66,000

                                                                                                                      90,000

Add: 2^nd yr H.P interest 930/100 x 90000)                                             127,000

                                                                                                                       117,000

Deduct: 2^nd yr installment                                                                            66,000

                                                                                                                          51,000

Add: 3rd H.P interest (30/100 x 51000)                                                      15,300

                                                                                                                          66,300

Deduct: 3^rd installment                                                                                  66,300

                                                                                                                           NIL

      DR               SONGAMBELE (Debtors) ACCOUNT                  CR

        DR                    SALES     ACCOUNT                           CR

DR        H.P INTEREST RECEIVED ACCOUNT     CR

   DR
PROVISION FOR UNREALIZED PROFIT A/C         CR

   DR   H.P TRADING ACCOUNT FOR THE YEAR ENDED      CR

   DR             H.P TRADING ACCOUNT FOR THE YEAR 1991          CR

     DR         H.P TRADING ACCOUNT FOR THE YEAR 1991          CR

EXERCISE

Chaubuyu deals in motor vehicle. He sells motor vehicle on hire purchase basic. He sold two motor vehicles to Manumanu on 1^st July 1998 for Tshs 80000. The cash price of these vehicles was Tshs 6500000. The payment was to be made as under deposit Tshs 200000. 24 monthly installment of Tshs 25000 each payable on lost day of every month. The company recognizes profit on Hire purchase sales in the year of sales but hire purchase interest apportioned on time basis. The financial year of Chaubuyu ends on 31 Dec each year.

Required

Record this transaction in the books of Chaubuyu carrying down the balances as on 31^st Dec 1998.

1. Hire purchase sales Account.
   
2. Hire purchases Debtors Account.
   
3. Hire purchases interest suspense Account.
   

 

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Solution

H.P interest = total H.P price – cash price

                        = 800000 – 650000

                        = 150000

Monthly H.P. interest received = 150000 x 6

                                                               24

                                                     = 37,500

     DR              H.P DEBTORS ACCOUNT                                     CR

   DR                  H.P   SALES ACCOUNT                                           CR

     DR      H.P INTEREST SUSPENSE ACCOUNT                                   CR