Unit – 3
ROYALTY, HIRE PURCHASE SYSTEM AND INSTALMENT PAYMENT SYSTEM OF ACCOUNTS
Under the Hire Purchase System, the ownership in asset is not owned by the hirer (hire purchaser). Nevertheless, Depreciation is provided by the hire purchaser on such assets since:
(a) It is used for the business and
(b) It is likely to be owned in near future on payment of the last instalment.
Depreciation may be charged either under the Straight Line Method or the Written Down Method. It should be noted that Depreciation is charged with reference to the cost of the asset i.e. its cash price and not its hire purchase price.
Under the Instalment Payment System, the ownership is transferred by the seller to the buyer at the time of sale (at the time of signing the contract), unlike Hire Purchase System, where the ownership is transferred only upon the payment of last instalment.
Difference Between both the terms is explained with the help of following points:
Ownership: The ownership in goods is transferred from the seller to the buyer only upon the payment of last instalment.
In IP System, the ownership is transferred upon signing of the contract.
Rights: In HP System, the buyer cannot sell or transfer the goods. He is even responsible for the good condition of the hire purchased goods.
In IP System, the buyer can sell or transfer the goods, as the buyer becomes the legal owner of the goods.
Risk: All the risks are borne by the seller, till the payment of last instalment by the buyer.
In IP System, all the risks are borne by the buyer, as soon as he signs the agreement.
Returning of Goods: In HP System, the goods can be returned by the buyer to the seller, anytime before the payment of the last instalment.
In IP System, the buyer cannot return the goods to seller, once the contract comes to force between the two parties.
Q1) Mr. Shashi brought a refrigerator under Hire Purchase System for a cash price of 15,675 with the following terms:
(A) 4,500 to be paid on signing the agreement.
(B) Balance to be paid in three equal instalments of 4,500 at the end of each year.
(C) The rate of interest charged for the hire purchase is 10% per annum.
Calculate the amount of instalment interest. Also pass Journal Entries in the books of the Buyer as well as the Seller.
Solution: Cash Price, Instalment Interest and Instalment Cash Price
Particulars / Instalment | Down | 1 | 2 | 3 | Total |
(1-4) | 15,675 4,500 0 4,500 11,175 | 11,175 4,500 1,118 3,382 7,793 | 7,793 4,500 779 3,721 4,072 | 4,072 4,500 428 4,072 (0) |
18,000 2,325 15,675
|
Q2) The Car Mart company purchases a motor car from Autoriders Company on a hire purchase agreement on January 1, 2011, paying cash 10,000, and agreeing to pay further three instalments of 10,000 each on 31st December each year. The cash price of the car is 37,250 and the Autoriders Company charges interest at 5% p.a. The Car Mart Company writes off 10% p.a. As depreciation on the reducing instalments system. Compute the amount of yearly depreciation. Prepare Journal Entries in the books of Buyer & Seller.
Solution: Calculation of Closing WDV at the end of the Year 1/Year 2/Year 3
Particulars / Year | Year 1 2011 | Year 2 2012 | Year 3 2013 |
Opening W.D.V. (1-1) Less: Depreciation @ 10% on Opening W.D.V. = Closing W.D.V. (31-12) | 37,250 3,725 33,525 | 33,525 3,353 30,172 | 30,172 3,017 21,155 |
Journal Entries in the books of Car Mart Company (Buyer)
Date | Particulars | Debit | Credit |
2011 Jan 1
Dec 31
2012 Dec.31
2013 Dec.31 |
Motor Car A/c Dr. To Autoriders Company (Being the total cash price due to the hire vendor for hire purchase of car as per agreement dated….) |
37,250
10,000
1,363
10,000
3,725
5,088
931
10,000
3,353
4,284
456
10,000
3,017
3,473
1,02,940 |
37,250
10,000
1,363
10,000
3,725
1,363 3,725
931
10,000
3,353
931 3,353
456
10,000
3,017
3,473
1,02,940 |
Autoriders Company A/c Dr. To Bank A/c (Being the down payment made to hire vendor)
Interest A/c Dr. To Autoriders Company (Being the interest for the year due to hire vendor)
Autoriders Company Dr. To Bank A/c (Being the payment of instalment due)
Depreciation A/c Dr. To Motor Car A/c (Being the depreciation on motor car for the year)
Profit & Loss A/c Dr. To Interest A/c To Depreciation A/c (Being the amounts charged to P & L A/c at the year end)
Interest A/c Dr. To Autoriders Company A/c (Being the interest for the year due to hire vendor)
Autoriders Company A/c Dr. To Bank A/c (Being the payment of instalment due)
Depreciation A/c Dr. To Motor Car A/c (Being the depreciation on motor car for the year)
Profit & Loss A/c Dr. To Interest A/c To Depreciation A/c (Being the amounts charged to P & L A/c at the year end)
Interest A/c Dr. To Autoriders Company A/c (Being the interest for the year due to hire vendor)
Autoriders Company A/c Dr. To Bank A/c (Being the payment of instalment due)
Depreciation A/c Dr. To Motor Car A/c (Being depreciation charged on motor car)
Profit & Loss A/c Dr. To Interest A/c To Depreciation A/c (Being the amounts charged P & L A/c at the year end)
|
Journal Entries in the books of Autoriders Company (Seller)
Date | Particulars | Debit | Credit |
2011 Jan 1
Dec 31
2012 Dec.31
2013 Dec.31 |
Car Mart A/c Dr. To Sales (Being the total cash price due to the hire vendor for hire purchase of car as per agreement dated….)
Bank A/c Dr. To Car Mart A/c (Being the down payment received from hire vendor) Car Mart Company A/c Dr. To Interest Earned A/c (Being the interest for the year due from hire vendor)
Bank A/c Dr. To Car Mart Company Earned A/c (Being the receipt of instalment due)
Interest Earned A/c Dr. To Profit & Loss A/c (Being the interest transferred to P & L A/c at the year end )
Car Mart Company A/c Dr. To Interest Earned A/c (Being the interest for the year due from hire vendor)
Bank A/c Dr. To Car Mart Company Earned A/c (Being the receipt of instalment due)
Interest Earned A/c Dr. To Profit & Loss A/c (Being the interest transferred to P & L A/c at the year end )
Car Mart Company A/c Dr. To Interest Earned A/c (Being the interest for the year due from hire vendor)
Bank A/c Dr. To Car Mart Company Earned A/c (Being the receipt of instalment due)
Interest Earned A/c Dr. To Profit & Loss A/c (Being the interest transferred to P & L A/c at the year end )
|
37,250
10,000
1,363
10,000
1,363
931
10,000
931
456
10,000
456
|
37,250
10,000
1,363
10,000
1,363
931
10,000
931s
456
10,000
456
|
82,750 | 82,750 |
Reference-
- S. M. Shukla : Financial Accounting.
- Singh and Singh : Financial Accounting.
- Bhrigu Nath Ojha & Others. : Company Accounting.
- M. C. Shukla : Advanced Accounts.
- R. D. Gupta : Advanced Accounts.
- T. S. Grewal : Financial Accounts.
- Paul and Paul : Financial Accounting
