Exercise - Hire purchase

Hire purchase exercise

Salma Bhd purchased a new car on 1 January 2019 from Ashikin Bhd on a hire purchase terms under which Salma Bhd paid a deposit of RM200,000 to be followed by four equal annual instalments of RM315,471 each, payable on 31 December. Interest is charged on outstanding balance at 10% per annum. Cash price of the car is RM1,200,000.

The accounting year of both companies ends on 31 December. Depreciation on the car is at 20% per annum on straight-line basis. All the sums due were paid on due dates.

Required:

Show the relevant journal ledger entries in the books of Salma Bhd

Prepare an extract of Statement of Profit and Loss Account and Statement of Financial Position for the year 2021 and 2022.        

Hire Purchase - worked example in the book of purchaser

Interest payable on hire purchase

When we deal with a hire purchase, we must be ready to be charged interest. This is because the amount cost of asset acquired is not being paid fully. Therefore the balance is being charged interest to compensate the ‘loss’ on income by the seller in the sense that they could get the full amount of the money when they sold the asset to you. By taking such risk because you and the seller had made a hire purchase agreement on the transaction they charged you interest. From here they made some profit from it. It is riba’ right?

Go for Islamic financing….

Here are some examples on the hire purchase transaction

Example 1.

Sabrina wants to purchase a computer costing RM2,000 in 2019. She has done her calculation and she can’t afford to pay on a lump sum payment. So she decided to go for instalments. The hire purchase price is RM2,300 payable in two instalments at the end of each year. Minimum payment is RM1,000 plus interest. The interest on hire purchase is 10% per annum.

Year 1	Cash price	RM2,000
	Add: interest 10%	200
	Amount owing at the end of year 1	2,200
	Less: 1st instalment	(1,200)
	Balance at the end of the year 1	1,000
Year 2	Add: interest 10%	100
	Amount owing at the end of year 2	1,100
	Less: 2nd instalment	(1,100)
	Balance at the end of year 2	-nil-

That is what we call unequal instalments. The situation was based on the sentence ‘Minimum payment is RM1,000 plus interest’. So the minimum payment was added to the reducing interest charged each year.

Example 2

We use the same situation as example 1 but this time we change the persons name. I guess many people will have the chance the computer.

Sofea wants to purchase a computer. The cost is still RM2,000 but cash. Since she had no money to pay in full so she decided to pay by instalments. The hire purchase price is not mentioned but the agreement shows that she has to pay equal instalment of RM1,152 each year for two years. Interest of 10% per annum applies on the balance of each year.

So here we go…

Year 1	Cash price	RM2,000
	Add: interest 10%	200
	Amount owing at the end of year 1	2,200
	Less: 1st instalment	(1,152)
	Balance at the end of the year 1	1,048
Year 2	Add: interest 10%	104
	Amount owing at the end of year 2	1,152
	Less: 2nd instalment	(1,152)
	Balance at the end of year 2	-nil-

We call the above method is equal instalments. By adding all together we can see that the total payment paid in order for Sofea to own the computer is RM2,304, quite same with the hire purchase price indicated in example 1.

The journal entries.

In the book of purchaser. (for example 1)

Purchased the computer at cost
Dr	Asset - Computer		2,000
	Cr	HP creditor			2,000
Hire purchase interest (1st year)
Dr	HP Interest		200
	Cr	HP creditor			200
1st instalment
Dr	HP creditor			1,200
	Cr	Bank			1,200
Hire purchase interest (2nd year)
Dr	HP Interest		100
	Cr	HP creditor			100
2nd instalments
Dr	HP creditor		1,100
	Cr	Bank			1,100

You can apply the same for the second example. Actually I’m just tired to do that. Learn ok?

What about in the book of seller?

Coming to you this summer at the cinema near you and watch out what will happen to the seller…..

ACC2233 - Short Quiz

Assalamualaikum and dear students,

This is our final round of quiz. Marks will be given to the fastest all correct answers. Snap your answer and yippi me ASAP.

Relax, marks will also be given to those who are late but will rated according to the time ranking.

Happy finals!

Short Quiz

1.       A machine costing RM12,000 was sold to a client on hire purchase term  in January 2016. The cash price of the machine was RM16,000. The interest rate was fixed to be 8% per annum which is payable on 31 December each year. The depreciation rate for the machine is 20% per annum at cost. Instalment payment was agreed for RM3,200 plus interest charged during the year.

Required: (in the book of purchaser)

        a)      Asset account

        b)      Hire purchase creditor account

        c)       Provision for depreciation account

2. The above machine was confiscated in March 2019 due to failure of instalments payment. The supplier took the machine with zero compensation.

Required : (in the book of purchaser)

        a)      Asset disposal account

3.   Independent from the above question, assuming the machine instalment was fixed at RM3,772 per annum for 5 years, then…

Required: (in the book of seller)

       a)      Hire purchase seller account

       b)      Hire purchase debtor account

       c)       Hire purchase interest account

4.   Haslita acquired a vacant factory at a cost of RM620,000. During the process, she has to pay for the stamp duty worth RM1,200, legal fees to Tetuan Khatijah & Co for RM10,500, a bribe to a Minister RM50,000. She also has to build a new fence around the factory to safeguard her trucks amounting RM13,000.

Required:

Calculate the initial cost for the above to be recognized in the Statement of Financial Position at the end of the year.

Calculate the following using the FIFO and Weighted Average method;

Date	Transactions
Mar     1	Purchased 70 units at RM15 each
3	Sold 25 units at RM22 each
4	Purchased 20 units at RM16 each
6	Sold 40 units at RM23 each
9	Sold 20 units at RM24 each
12	Purchased 30 units at RM15.50 each
13	Sold 15 units at RM22 each