CA NITIN GOEL HIRE PURCHASE

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INTRODUCTION

Under the Hire Purchase System, the Hire Purchaser gets possession of the goods at the
outset and can use it, while paying for it in instalments over a specified period of time as
per the agreement.
However, the ownership of the goods remains with the Hire Vendor until the hire
purchaser has paid all the instalments.

TERMS USED

Hire Vendor A person who delivers the goods along with its possession to the
hire purchaser under hire purchase agreement.

Hire A person who obtains the goods and rights to use the same from
Purchaser hire vendor under hire purchase agreement.

Cash Price The amount to be paid by the buyer on outright purchase in cash.

Down Payment The initial payment made to the hire vendor by the hire purchaser at
the time of entering into hire purchase agreement.

Hire Purchase The amount which the hire purchaser has to pay after a regular
Instalment interval upto certain period as specified in the agreement to obtain

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the ownership of the asset purchased under a hire purchase

agreement. It comprises of principal amount and the interest on the
unpaid amount.

Hire purchase The total sum payable by the hire purchaser to obtain the ownership
price of the asset purchased under hire purchase agreement. It comprises
of cash price and interest on outstanding balances.

FEATURES

Possession The hire vendor transfers only possession of the goods to the hire
purchaser immediately after the contract for hire purchase is made.

Instalments The goods are delivered by the hire vendor on the condition that a
hire purchaser should pay the amount in periodical instalments.

Down Payment The hire purchaser generally makes a down payment i.e an amount
on signing the agreement.

Constituents Each instalment consists partly of a finance charge (interest) and

of instalments partly of a capital payment

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.

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.

DIFFERENCE BETWEEN HIRE PURCHASE & INSTALMENT PURCHASE AGGREMENT

Basis Hire Purchase Agreement Instalment Purchase Agreement

Governing It is governed by Hire Purchase It is governed by the Sale of Goods
Act Act, 1972. Act, 1930.
Nature of It is an agreement of hiring It is an agreement of sale.
Contract
Passing of The title to goods passes on The title to goods passes
Title last payment immediately as in the case of usual
(ownership) sale.
Right to The hirer may return goods Unless seller defaults goods are not
Return goods without further payment except returnable.
for accrued instalments.
Seller’s right The seller may take possession The seller can sue for price if the
to repossess of the goods if hirer is in buyer is in default. He cannot take
default. possession of the goods.

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Right of Hirer cannot hire out, sell, The buyer may dispose off the goods
Disposal pledge or assign entitling and give good title to the bona fide
transferee to retain possession purchaser.
as against the hire vendor.
Responsibility The hirer is not responsible for The buyer is responsible for risk of
for Risk of risk of loss of goods if he has loss of goods because of the
Loss taken reasonable precaution ownership has transferred.
because the ownership has not
yet transferred.
Name of The parties involved are called The parties involved are called
Parties Hirer and Hire vendor buyer and seller.
involved
Component Component other than Cash Component other than Cash Price
other than Price included in instalment is included in Instalment is called
cash price called Hire charges. Interest.

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Case- A: Cash Price and Rate of Interest given

Example 1:
Cash Price ₹ 10 Lacs. Down Payment 20%. Balance in 4 equal annual instalments together
with interest to be paid at the end of each year. Rate of Interest 20% p.a.
Calculate amount of interest & instalments.

Example 2:
Cash Price ₹ 10 Lacs. Down Payment 20%. Balance in 4 equal annual instalments together
with interest to be paid at the end of each year. Rate of Interest 20% p.a. compounded half
yearly. Calculate amount of interest & instalments.

Example 3:
Cash Price ₹ 60,000. Down payment- ₹ 15,000. Rate of Interest- 10% p.a. Balance in Three
half yearly instalments of ₹ 15,000 each. Compute the amount of interest.

Case B: Cash Price & Interest rate given but instalment

includes interest
Example 4:
Cash Price ₹ 37,500. Down payment- ₹ 5,000. Rate of Interest- 5% p.a. Balance in Five
instalments of ₹ 7,500 each. Compute the amount of interest.

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Case C: Calculation of Interest when HPP and Rate of Interest

given but Cash Price not given
Example 5:
Down payment- 20%. Balance in 4 annual instalments of ₹2,80,000, ₹2,60,000, ₹2,40,000,
and ₹2,20,000. Rate of Interest- 10% p.a. Compute Cash Price.

Example 6:
Down payment- ₹ 5,000. Balance in 3 equal annual instalments of ₹ 5,000 each.
Rate of Interest- 5% p.a. Compute Cash Price.

Example 7:
Down payment- 40%. Asset Purchased on 1st January, 2018. Rate of Interest- 10% p.a.
Compute Cash Price. 3 Instalments as follows:
31st Dec. 2019: ₹ 16,300 31st Dec. 2020: ₹ 12,000 31st Dec. 2021: ₹ 11,000

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Case- D: Calculation of Interest when HPP given but both

Cash Price & Rate of Interest are not given.
Assumption:- Cash Price (Principal Amount) included in each instalment is equal.
Example 8:
Down payment- ₹ 15,850. Four instalments of ₹ 22,190, ₹ 20,605, ₹ 19,020 and ₹ 17,435 at
the end of the 1st year, 2nd year, 3rd year and 4th year respectively. The payment of cash
price in each instalment is uniform. Compute the amount of cash price & interest.

Example 9:
Down payment- ₹ 1,000. Three instalments of ₹1,040, ₹960, and ₹880 at the end of the 1st
year, 2nd year and 3rd year respectively. Compute the amount of cash price & interest.

Case- E: Calculation of Interest when Cash Price &

Instalments are given but the rate of Interest is not given
Example 10:
Cash Price ₹ 10 Lacs. Down Payment 20%. Balance in 4 equal annual instalments of ₹
2,50,000 each. Calculate amount of interest included in each instalment.

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Example 11:
Cash Price ₹ 30 Lacs. Down Payment 20%. Balance in 4 instalments of ₹ 8,40,000, ₹
7,80,000, ₹ 7,20,000 and ₹ 6,60,000. Calculate amount of interest included in each
instalment.

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ACCOUNTING METHODS UNDER HIRE PURCHASE

I. Cash Price/ Sales Method

S. No Particulars Books of Hire Purchaser Books of Hire Vendor
1. On Agreement Asset A/c Dr. Hire Purchaser A/c Dr.
To Hire Vendor A/c To Sales/Asset A/c
(With Cash Price) (With Cash Price)
2. On Making Down Hire Vendor A/c Dr. Cash & Bank A/c Dr.
Payment To Cash & Bank A/c To Hire Purchaser A/c

3. When Interest is Interest A/c Dr. Hire Purchaser A/c Dr.

due To Hire Vendor A/c To Interest A/c

4. When Instalment Hire Vendor A/c Dr. Cash & Bank A/c Dr.
is paid To Cash & Bank A/c To Hire Purchaser A/c

5. On providing Depreciation A/c Dr.

Depreciation* To Asset A/c No Entry

6. Closure of P&L A/c Dr.

Depreciation A/c To Depreciation A/c No Entry

7. Closure of Interest P&L A/c Dr. Interest A/c Dr.

A/c To Interest A/c To P&L A/c

Note:-
However a concern may maintain Provision for Depreciation A/c instead of charging to
Hire Purchase Asset A/c. In such case entry will be:
Depreciation A/c Dr.
To Provision for Depreciation A/c

➢ DISCLOSURE IN BALANCE SHEET

BALANCE SHEET OF HIRE PURCHASER
Liabilities Amount Assets Amount
Hire Vendor A/c Hire Purchase Asset xx
(Creditor) xx Less Depreciation (xx) xx

BALANCE SHEET OF HIRE VENDOR

Liabilities Amount Assets Amount
Hire Purchaser A/c
(Debtor) xx

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II. Interest Suspense Method

S. Particulars Books of Hire Purchaser Books of Hire Vendor
No
1. On Asset A/c Dr. (CP) Hire Purchaser A/c Dr. (HPP)
Agreement Interest Suspense A/c Dr. (Int) To Sales/Asset A/c (CP)
To Hire Vendor A/c (HPP) To Interest Suspense A/c (Int)

2. On Making Hire Vendor A/c Dr. Cash & Bank A/c Dr.
Down To Cash & Bank A/c To Hire Purchaser A/c
Payment
3. When Interest A/c Dr. Interest Suspense A/c Dr.
Interest is To Interest Suspense A/c To Interest A/c
due
4. When Hire Vendor A/c Dr. Cash & Bank A/c Dr.
Instalment is To Cash & Bank A/c To Hire Purchaser A/c
paid
5. On providing Depreciation A/c Dr.
Depreciation* To Asset A/c No Entry

6. Closure of P&L A/c Dr.

Depreciation To Depreciation A/c No Entry
A/c
7. Closure of P&L A/c Dr. Interest A/c Dr.
Interest A/c To Interest A/c To P&L A/c

*Note:-
However a concern may maintain Provision for Depreciation A/c instead of charging to
Hire Purchase Asset A/c. In such case entry will be:
Depreciation A/c Dr.
To Provision for Depreciation A/c

➢ DISCLOSURE IN BALANCE SHEET

SHEET BALANCE SHEET OF HIRE PURCHASER
Liabilities Amount Assets Amount

Hire Vendor A/c xx

Hire Purchase Asset xx
(-) Interest Suspense (xx) xx
Less Depreciation (xx) xx

BALANCE SHEET OF HIRE VENDOR

Liabilities Amount Assets Amount

Hire Purchaser A/c xx

(-) Interest Suspense (xx) xx

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DEFAULT AND REPOSSESSION

In a hire purchase agreement, the hire purchaser has to pay up to the last instalment to
obtain the ownership of goods. If the hire purchaser fails to pay any of the instalments,
the hire vendor takes the asset back in its actual form without any refund of the earlier
payments to the hire purchaser. This act of recovery of possession of the asset is termed
as repossession.

I. Complete Repossession
In case of complete repossession the hire vendor takes back the possession of all the
goods. All entries till the date of default are passed in usual manner. The additional
entries are as follows:
Books of Hire Purchaser
S. No Particulars Journal Entry
1. For Closing Hire Vendor’s Hire Vendor A/c Dr.
Account To Asset A/c
(With Value appearing in Hire Vendor A/c)
2. For Closing Asset Account Balance of Asset A/c transferred to P&L A/c as
Profit/Loss on surrender
Loss: Profit:
P&L A/c Dr. Asset A/c Dr.
To Asset A/c To P&L A/c

Books of Hire Vendor

S. No Particulars Journal Entry
1. On Repossession of Goods Repossessed A/c Dr.
Goods To Hire Purchaser A/c
(With agreed value of goods repossessed if given.
If not given, then consider value appearing in
Hire Purchaser A/c)
Note: In case agreed value given then balance in
Hire Purchaser A/c is Profit/Loss on repossession
transferred to P&L A/c
2. For Amount spent on Goods Repossessed A/c Dr.
reconditioning / repair To Cash & Bank A/c
of repossessed goods
3. For sale of repossessed Cash & Bank A/c Dr.
goods To Goods Repossessed A/c
4. For Profit/Loss on sale Profit/Loss on sale transferred to P&L A/c
of repossessed goods Loss:
P&L A/c Dr.
To Goods Repossessed A/c
Profit:
Goods Repossessed A/c Dr.
To P&L A/c

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II. Partial Repossession

In case of partial repossession, the hire vendor takes back the possession of a part of
the goods.
All entries till the date of default are passed in usual manner. The additional entries are
as follows:
Books of Hire Purchaser
S.No Particulars Journal Entry
1. For transfer of the agreed Hire Vendor A/c Dr.
value of Goods To Asset A/c
Repossessed (With Agreed Value of Goods Repossessed)

2. For Transfer of Profit/Loss First find out the closing balance of Asset A/c*
on Default /Surrender
Thereafter balance of Asset A/c is transferred
to P&L A/c as Profit/Loss on surrender

Loss: Profit:
P&L A/c Dr. Asset A/c Dr.
To Asset A/c To P&L A/c
* Closing Balance
Value as if there is no Repossession x Balance no. of Assets
Total no. of Assets

Books of Hire Vendor

S.No Particulars Journal Entry
1. On Repossession of Goods at Agreed Goods Repossessed A/c Dr.
Value To Hire Purchaser A/c
(With agreed value of goods
repossessed)

2./3./4.-
Same as in case of Complete Repossession

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ASSIGNMENT QUESTIONS

TOPIC 1: Basic Concepts

Question 1 (ICAI Study Material) Pg no._____
Om Ltd. purchased machine on hire purchase basis from Kumar Machinery Co. Ltd. on
following terms:
(a) Cash price ₹ 80,000
(b) Down payment at the time of signing the agreement on 1.1.2021 ₹ 21,622.
(c) 5 annual instalments of ₹ 15,400, the first to commence at the end of twelve months
from the date of down payment.
(d) Rate of interest is 10% p.a.
You are required to calculate the total interest and interest included in cash instalment.

Question 2 Pg no._____
Ram & Co. acquired a motor lorry on hire–purchase basis. It has to make cash down
payment of ₹ 1,00,000 at the beginning. The payments to be made subsequently are ₹
2,63,000; ₹ 1,85,000 and ₹ 1,14,000 at the end of first year, second year and third year
respectively. Interest charged is @ 14% per annum.
Calculate the cost price of motor lorry and interest paid in each instalment.

Question 3 (ICAI Study Material) Pg no._____

A acquired-on 1st January, 2021 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, 2021. Assuming that the applicable rate of interest is 10% p.a., calculate the cash
value of the machine.

Question 4 Pg no._____
A Ltd. purchases plant on hire purchase basis for ₹ 1,00,000 & makes payment in the
following order: Down payment ₹ 20,000,
the 1st instalment after one year ₹ 40,000.
the 2nd instalment after two years ₹ 20,000 and the last instalment after three years.
The cash price of the plant is ₹ 86,000. You are required to calculate:
(i) the total interest and (ii) the interest included in each instalment.

Question 5 (ICAI Study Material) Pg no._____

On 1st April, 2021 a manufacturing company buys on Hire purchase system a machinery
for ₹ 90,000 payable by 3 equal annual instalments combining principal & interest, the
rate of interest was 5% p.a. Calculate the amount of cash price & interest. Assume that
the present value of an annuity of Re. 1 for 3 years at 5% interest is 2.723.

TOPIC 2A: BOOKS OF HIRE PURCHASER & HIRE VENDOR: CASH PRICE/SALES METHOD

Question 6 Pg no._____
The following are the particulars relating to hire purchase:
Purchaser- Ram & Co. Seller- Shyam & Co.
Date of Purchase - Jan.1 2021 Asset Purchased- Machine

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Cash Price- ₹ 12,894

Payments- ₹ 2,000 on signing of the agreement and the balance in 3 equal annual
instalments of ₹ 4,000 due on 31st December each year. Rate of Interest- 5% p.a.
Depreciation- 20% on written down value each year.
Prepare necessary ledger accounts in the books of both parties for 3 years.

Question 7 Pg no._____
On April 1, 2019 Chandra Transport Company purchased a mini truck from S. K. Motors on
hire purchase system. The terms were that they would pay ₹ 1,00,000 down on same date
& balance was payable in three annual instalments.
First instalment amounted to ₹ 74,000 was payable on 31/3/2020, second ₹ 93,000 on
31/3/2021 & third ₹ 84,000 on 31/3/2022. Interest is charged @ 12% p.a.
Rate of depreciation is 20% on written down value.

You are required to calculate the total cash price and prepare,
(i) S. K. Motors Account; and
(ii) Mini–Truck Account in the Books of Chandra Transport Company.

Question
(iii) 8
(ICAI Study Material) Pg no._____
Happy Valley Florists Ltd. acquired a delivery van on hire purchase on 01.04.2018 from
Ganesh Enterprises.
The terms were as follows:
Particulars Amount (₹)
Hire Purchase Price 1,80,000
Down Payment 30,000
1st instalment payable after 1 year 50,000
2nd instalment after 2 years 50,000
3rd instalment after 3 years 30,000
4th instalment after 4 years 20,000
Cash price of van ₹ 1,50,000 and depreciation is charged at 10% WDV.
You are required to:
(i) Calculate Total Interest and Interest included in each instalment
(ii) Prepare Van A/c., Ganesh Enterprises A/c. in the books of Happy Valley Florists Ltd.
up to 31.03.2022.

Question 9 (ICAI Study Material)/ RTP MAY 2020 (Similar) Pg no._____

On January 1, 2020 HP M/s acquired a pick-up Van on hire purchase from FM M/s The
terms of the contract were as follows:
(a) The cash price of the van was ₹ 1,00,000
(b) ₹ 40,000 was to be paid on signing of the contract.
(c) The balance was to be paid in annual instalments of ₹ 20,000 plus interest.
(d) Interest chargeable on the outstanding balance was 6% p.a.
(e) Depreciation at 10% p.a. is to be written-off using the straight-line method.

You are required to pass necessary journal entries for 3 years and
(a) Show the relevant accounts in the books of HP M/s from January 1, 2020 to December
31, 2022; and
(b) Show the relevant items in the Balance Sheet of the purchaser as on December 31,
2020 to 2022.

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TOPIC 2B: BOOKS OF HIRE PURCHASER & HIRE VENDOR: INTEREST SUSPENSE METHOD

Question 10 (ICAI Study Material) Pg no._____

In the above question assume that the hire purchaser adopted the interest suspense
method for recording his hire purchase transactions. On this basis, prepare H.P. Interest
Suspense Account, Interest Account and FM M/s Accounts and Balance Sheets in the
books of Hire purchaser.

Question 11 (RTP May 2021) Pg no._____

On 1st April 2019 M/s KMR acquired a machine on hire purchase from M/s PQR on the
following terms:
(1) Cash price of the machine was ₹ 2,40,000.
(2) The down payment at the time of signing the contract was ₹ 96,000.
(3) The balance amount is to be paid in 3 equal annual instalments plus interest.
(4) Interest is chargeable @ 8% p.a.
On this basis prepare the H.P. Interest Suspense Account and Account of M/s PQR in the
books of the purchaser for the period of hire purchase.

TOPIC 3: COMPLETE REPOSSESSION

Question 12 Pg no._____
Delhi Co. purchased from Mumbai Co. three machines costing ₹ 40,000 each on the Hire
Purchase System. Payment was to be made ₹ 30,000 down and the remainder in three
equal instalments together with interest at 5%. Delhi Co. writes off depreciation @20% on
the diminishing balance. It paid the instalment due at the end of the first year but could
not pay the next.
Give the necessary Ledger Accounts in the books of both the parties for two years if the
hire vendor took possession of all the three machines. The hire vendor spent ₹ 5,800 on
getting the machines thoroughly overhauled and sold them for ₹ 70,000.

Question 13 Pg no._____
Shyam purchased from Rang Ltd. a color T.V set on 1st October, 2020 on the hire purchase
system. The cash price of the T.V set was ₹ 15,000. Terms of payment were ₹ 1,150 down
payment and half yearly instalments of ₹ 4,000 each, over two years. The first instalment
was to be paid on 31st March, 2021. Rate of interest was 12% p.a. Shyam could not pay
the second instalment due on 30th September, 2021 and as a consequence, Rang Ltd.
repossessed the T.V set after fulfilling legal formalities.
Prepare Shyam’s Account and Goods Repossessed Account in Rang Ltd.'s books.
Assume that the estimated value of the T.V set at the time of repossession was ₹ 12,000
and after an expenditure of ₹ 850 on repairs and repacking, the company resold it on 6th
December, 2021 for cash to one of its employees at a special discount of 10% on cash
price i.e. for ₹ 13,500. Rang Ltd. closes its books of accounts every year on 31st March.

Question 14 Pg no._____
On 1st April, 2021, 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

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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, 2021 but failed to pay the
instalment on 30th November, 2021. 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, 2022 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

TOPIC 4: PARTIAL REPOSSESSION

Question 15 Pg no._____
On 1.1.2020, X Ltd. purchased from Y Ltd. 5 Machines. Payment as to be made- 20% down
and the balance in four annual instalments of ₹ 2,80,000, ₹ 2,60,000, ₹ 2,40,000 and ₹
2,20,000 commencing from 31.12.2020. The vendor charged interest @ 10% p.a. X Ltd.,
writes off depreciation @20% p.a. on the original cost. Books closed on 31st December
every year. Prepare relevant accounts in the books of X Ltd. and Y Ltd. in each of the
following alternative cases:

Case I: On X Ltd.’s failure to pay the instalment due on 31.12.2021, Y Ltd. repossessed all
the machines and valued them on the basis of 40% p.a. depreciation on W.D.V. basis. Y
Ltd. after incurring ₹ 6,000 on repairs sold the machines for ₹ 2,66,000 on 30th June 2022.

Case II: On X Ltd.’s failure to pay the instalment due on 31.12.2021, after negotiations Y Ltd.
agreed to leave two machines with X Ltd. adjusting the value of the other three machines
against the amount due. The machines being valued at cost less 40% p.a. depreciation on
W.D.V. basis, Y Ltd. after spending ₹ 6,000 on repairs of each of such machines sold @₹
70,000 each on 30th June 2022.

Case III: On X Ltd. failure to pay the instalment due on 31.12.2021, Y Ltd. repossessed 3
machines & agreed to allow X Ltd. a credit for the amount paid against 3 machines less
25%. Y Ltd. spent ₹ 6,000 on repairs of these machines & sold one of such machines for
₹ 70,000 on 30th June, 2022.

Pg no._____
Question 16 (ICAI Study Material)
X Transport Ltd. purchased from Delhi Motors 3 Tempos costing ₹ 50,000 each on the
hire purchase system on 1-1-2020. Payment was to be made ₹ 30,000 down and the
remainder in 3 equal annual instalments payable on 31-12-2020, 31-12-2021 and 31-12-
2022 together with interest @ 9%. X Transport Ltd. write off depreciation at the rate of
20% on the diminishing balance. It paid the instalment due at the end of the first year i.e.
31-12-2020 but could not pay the next on 31-12-2021.
Delhi Motors agreed to leave one Tempo with the purchaser on 1-1-2022 adjusting the
value of the other 2 Tempos against the amount due on 31-12-2021. The Tempos were
valued on the basis of 30% depreciation annually.
Show the necessary accounts in the books of X Transport Ltd. for the years 2020, 2021
and 2022.

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Question 17 (ICAI Study Material) Pg no._____

Lucky bought 2 tractors from Happy on 1-10-2019 on the following terms:
Down payment 5,00,000
1st instalment at the end of first year 2,65,000
2nd instalment at the end of 2nd year 2,45,000
3rd instalment at the end of 3rd year 2,75,000
Interest is charged at 10% p.a. Lucky provides depreciation @ 20% on the diminishing
balances. On 30-9-2022 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.

Question 18 Pg no._____
Salman & Co. purchased seven trucks on hire purchase on 1st July, 2021. The cash
purchase price of each truck was ₹ 50,000. The company has to pay 20% of the cash
purchase price at the time of delivery and the balance in five half yearly instalment
starting from 31st December, 2021 with interest at 5% p.a. at half yearly rest.
On the Company’s failure to pay the instalment due on 30th June 2022, it was agreed that
the company would return 3 trucks to the vendor and the remaining four would be
retained. The vendor agreed to allow him a credit for the amount paid against these 3
trucks less 25%. Vendor after spending ₹ 1,000 on repairs sold away all the three trucks
for ₹ 40,000.

Required: Show the relevant Accounts in the books of the purchaser and vendor
assuming the books are closed in June every year and depreciation @20% p.a. is charged
on trucks.

Question 19 Pg no._____
On 1st January, 2021 five machines were purchased by A on the hire purchase system.
The cash price of each machine is ₹ 55,000.
The payment was to be made be follows:
10% of cash price down.
25% of cash price at the end of each one of the subsequent four half years.
The payment due on 31st December, 2021 could not be made and hence machines were
seized by the vendor but, after negotiations, A was allowed to keep three machines on
the condition that the value of the other two machines would be adjusted against the
amount due, the machines being valued at cost less 25% depreciation.
A’s books are closed on 30th June each year and he charges 15% depreciation on
machines on the original cost.
The vendor spent ₹ 6,000 on getting the machines thoroughly overhauled & sold them for
₹ 95,000.
Show the necessary accounts in the books of both the parties.

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Question 20 Pg no._____
On 1st January, 2020 X purchased machinery from Y on Hire purchase system at a
valuation of ₹ 20,000 payable in four yearly instalments of ₹ 5,000 each together with
interest @10% p.a. X had decided to write off 10% p.a. depreciation on diminishing balance
method.
Only 2 instalments were paid and Y arranged immediately, the 3rd instalment had become
due, to take machinery which cost ₹ 14,000 allowing ₹ 7,500 provided that X paid all the
interest due to that date on the full amount owing.
Show Machinery Account and Y’s account in the books of X according to the above.

TOPIC 5: MISC. QUESTIONS

Question 21 Pg no._____
On 1st January, 2020, X & Co. entered into an agreement to purchase 200 Sewing
Machines on hire-purchase system from Y & Co. Price was to be paid in equal half yearly
instalments of ₹ 14,770 on 30th June and 31st December each year for three years. Cash
price was ₹ 400 per sewing machine and rate of interest was 6% p.a. payable on half
yearly balances.
On 1st January, 2021 after paying two instalments X & Co. transferred the machines
to Z and Co. after receiving ₹ 20,000. Z & Co. paid this amount to X & Co. immediately and
remaining instalments to Y & Co. on due dates.
Record the above transactions in the books of Z & Co. by way of Journal Entries
for the financial year ended 30th June, 2021. Charge depreciations on sewing machines
@ 10% p.a.

Question 22 Pg no._____
A firm acquired two tractors under hire purchase agreements, details of which were as
follows:
Date of Purchase Tractor A Tractor B
1st April 2020 1st Oct 2020
Cash price 14,000 19,000
Deposit 2,000 2,680
Interest (deemed to accrue evenly 2,400 2,880
over the period of agreement)
Both agreements provided for payment to be made in twenty-four monthly instalments,
commencing on the last day of the month following purchase, all instalments being paid
on due dates. On 30th June, 2021, Tractor B was completely destroyed by fire. In full
settlement, on 10th July, 2021 an insurance company paid ₹ 15,000 under a comprehensive
policy out of which ₹ 10,000 was paid to the hire purchase company in termination of the
agreement. Any balance on the hire purchase company’s account in respect of these
transactions was to be written off. The firm prepared accounts annually to 31st December
and provided depreciation on tractors on a straight-line basis at a rate of 20 per cent per
annum rounded off to nearest ten rupees, apportioned as from the date of purchase and
up to the date of disposal.
You are required to record these transactions in the following accounts, carrying down
the balances on 31st December, 2020 and 31st December, 2021:
(a) Tractors on hire purchase (b) Provision for Depreciation on tractors
(c) Disposal of tractors (d) Hire purchase company

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PRACTICE QUESTIONS

TOPIC 1: BASIC CONCEPTS

Question 1 Pg no._____
X Ltd. purchased a machine on hire purchase basis from Y Ltd. on the following terms:
(a) Cash Down payment- ₹ 1,58,500
(b) Four instalments of ₹ 2,21,900, ₹ 2,06,050, ₹ 1,90,200 and ₹ 1,74,350 at the end of the
1st year, 2nd year, 3rd year and 4th year respectively.
(c) The payment of cash price in each instalment is uniform.
Compute the total cash price of the machine.
(Ans: Cash Price 7,92,500)
Question 2 (ICAI Study Material) Pg no._____
Asha purchased a truck on hire purchase system. As per terms she is required to pay ₹
70,000 down, ₹ 53,000 at the end of first year, ₹ 49,000 at the end of second year and ₹
55,000 at the end of third year. Interest is charged @ 10% p.a.
You are required to calculate the total cash price of the truck and the interest paid with
each instalment.
(Ans: Cash Price 2,00,000)
Question 3 (Inter July 2021) (5 Marks) Pg no._____
An Engineer ) purchased a compressing machine on hire purchase system. As per the
terms he is required to pay ₹ 1,40,000 down, ₹ 1,06,000 at the end of first year, ₹ 98,000
at the end of the second year ₹ 87,000 at the end of the third year and ₹ 55,000 at the end
of fourth year. Interest charged @ 12% p.a. You are required to calculate total cash price
of the machine and the interest paid with each instalment.
(Ans: Cash Price 4,09,646)
Question 4 Pg no._____
On 1.1.2019 Shaan Ltd. purchased a machine on hire purchase basis. The terms of
agreement provided for 40% as cash down payment and the balance in three instalments
of ₹ 1,63,000 on 31.12.2020, ₹ 1,20,000 on 31.12.2021 and ₹ 1,10,000 on 31.12.2022. The rate of
interest charged by the vendor is 10% p.a. compound annually.
Calculate the cash Price and periodic interest charged by hire vendor.
(Ans: Cash Price 5,00,000)
Question 5 Pg no._____
On 1.1.2019 Beeta Ltd. purchased a machine from Yama Ltd. on hire purchase basis. The
terms of agreement provided for 40% as cash down payment and the balance in three
instalments of ₹ 1,30,000 on 31.12.2019, ₹ 1,42,000 on 31.12.2021 and ₹1,10,000 on 31.12.2022.
The rate of interest charged by the vendor is 10% p.a. compounded annually. You are
required to calculate the cash price when 2nd instalment is payable after two years.
(Ans: Cash Price 5,00,000)
Question 6 Pg no._____
On 1st April, 2019, Fasttrack Motors Co. sells a Trucks on hire purchase basis to Teja
Transport Co. for a total purchase price of ₹ 9,00,000 payable as to ₹ 2,40,000 as down

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payment and the balance in three equal annual instalments of ₹ 2,20,000 each payable
on 31st March 2020, 2021 and 2022. 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.
(Ans: Cash Price 7,87,107)
Question 7 Pg no._____
Moon purchased a machine on Hire Purchase System. The total cost price of the machine
was ₹ 15,00,000 payable 20% down and four annual instalments of ₹ 4,20,000, ₹ 3,90,000,
₹ 3,60,000 and ₹ 3,30,000 at the end of the 1st, year 2nd year, 3rd year and 4th year
respectively. Calculate the interest included in each year’s instalment assuming that
sales were made at the beginning of the year.
(Ans: Interest Rate 10% and Interest 1,20,000; 90,000; 60,000; 30,000)

TOPIC 2A: BOOKS OF HIRE PURCHASER & HIRE VENDOR: CASH PRICE/SALES METHOD

Question 8 (Inter Jan 2021) (8 Marks) Pg no._____

Jai Ltd. purchased a machine on hire purchase basis from KM Ltd. on the following terms:
a) Cash price ₹ 1,20,000.
b) Down payment at the time of signing the agreement on 1-1-2016, ₹ 32,433.
c) 5 annual instalments of ₹ 23,100, the first to commence at the end of twelve months
from the date of down payment.
d) Rate of interest is 10% p.a.
You are required to calculate the total interest and interest included in each instalment.
Also prepare the Ledger Account of KM Ltd. in the books of Jai Ltd.
(Ans: Total Interest 27,933 and Interest 8,757; 7,322; 5,745; 4,009; 2,100)
Question 9 (RTP Nov 2021) Pg no._____
On January 1, 2018 M/s Hello acquired a Machine on hire purchase from M/s Pass. The
terms of the contract were as follows:
(a) The cash price of the Machine was ₹ 2,00,000.
(b) ₹ 80,000 were to be paid on signing of the contract.
(c) The balance was to be paid in annual instalments of ₹ 40,000 plus interest. The first
instalment was to be paid on 31st Dec. 2018.
(d) Interest chargeable on the outstanding balance was 6% p.a.
(e) Depreciation at 10% p.a. is to be written-off using the WDV method.
You are required to give Journal Entries in the books of M/s Hello from January 1, 2018 to
December 31, 2020.
(Ans: Interest 7,200; 4,800; 2,400)

TOPIC:2B BOOKS OF HIRE PURCHASER & HIRE VENDOR: INTEREST SUSPENSE METHOD

Question 10 (Inter Nov 2020) (8 Marks) / (ICAI Study Material) Pg no._____

On 1st April, 2017, Mr. Nilesh acquired a Tractor on Hire purchase from Raj Ltd. The terms
of contract were as follows:
a. The Cash price of the Tractor was ₹ 11,50,000
b. 2,50,000 were to be paid as down payment on the date of purchase.

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c. The Balance was to be paid in annual instalments of ₹ 3,00,000 plus interest at the
end of the year.
d. Interest chargeable on the outstanding balance was 8% p.a.
e. Depreciation @ 10% p.a. is to be written off using straight line method.
Mr. Nilesh adopted the Interest Suspense method for recording his Hire purchase
transactions.
You are required to: Prepare the Tractor account, Interest Suspense account and Raj
Ltd.s’ account in the books of Mr. Nilesh.
(Ans: Total Interest 1,44,000 & Interest 72,000; 48,000; 24,000)
Question 11 (ICAI Study Material) Pg no._____
M/s. Kodam Enterprises purchased a generator on hire purchase from M/s. Sanctum Ltd.
on 1st April, 2020. 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 off using the straight line method.
You are required to:
Calculate the cash price of the generator and the interest paid on each instalment.
Pass relevant journal entries in the books of M/s. Kodam Enterprises from 1st April, 2020
to 31st March, 2021 following the interest suspense method.
(Ans: Cash Price 42,925 & Interest 2,474; 1,712; 889)

TOPIC 3: COMPLETE REPOSSESSION

Question 12 (ICAI Study Material) Pg no._____

A machinery is sold on hire purchase. The terms of payment is four annual instalments
of ₹ 6,000 at the end of each year commencing from the date of agreement. Interest is
charged @ 20% and is included in the annual payment of ₹ 6,000.
Show Machinery Account and Hire Vendor Account in the books of the purchaser who
defaulted in the payment of the third yearly payment whereupon the vendor re-
possessed the machinery. The purchaser provides depreciation on the machinery @ 10%
p.a. on WDV basis. All workings should form part of your answers.
(Ans: Cash Price 15,532 & Loss on Surrender 323)
Question 13 Pg no._____
Shimla Transport company purchased a truck on hire-purchased system for ₹ 1,00,000
on January 1, 2020 from Shimla Motor company. The payment is to be made ₹ 25,000 at
the time of purchase and balance in three annual instalments of ₹ 30,000 each payable
at the end of each year. The Shimla Motor Company charges interest @10% p.a. The Shimla
Transport Company is charging deprecation @ 20% on written down value method.
Shimla Transport Company could not pay second instalment at the end of second year on
account of financial difficulties and Shimla Motor Company has taken over the possession
of the truck. After spending ₹ 4,000 on repairs and overhauling of truck, the Shimla Motor
Company sold the truck for ₹ 69,000.
Prepare ledger A/cs in the books of Shimla Transport Company & Shimla Motor Company.
(Ans: Loss on Surrender 6,250 & Profit on Sale of Repossessed Goods 7,250)

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Question 14 Pg no._____
‘X’ purchases a machine on 1st January, 2021, on the hire-purchase system. The cash
price of machine is ₹ 14,900. The terms of the agreement provided at the end of every six
months, for payment of ₹ 4,000 over two years. The first payment was to be made on
30th June, 2021. Rate of interest was 6% p.a.
‘X’ wrote off 10% p.a. depreciation on reducing balance system and closed his books on
the 30th June every year. ‘X’ could not pay the instalment due on 30th June, 2022 and as
a result, the hire vendor took back the possession of the machine.
Give the Machine Account and Vendor’s Account in the books of ‘X’ and show the loss
suffered by him.
(Ans: Loss on Surrender 4,821)
Question 15 (Inter Dec 2021) (8 Marks) Pg no._____
ABC Ltd. acquired a machine on hire purchase from P Ltd. with term of payment is four
equal instalments. The annual instalment is commencing from the date of agreement
signed by both the parties. The payment of annual instalments is ₹25,000 at the end of
each year. The interest is charged @25% and is included in the annual instalment. ABC
Ltd. could not pay third annual instalment and declared “Purchaser Defaulted” where
upon the P Ltd. act to repossess the Machinery. ABC Ltd. is providing depreciation on
Machine at the rate of 20% per annum on the Diminishing Balance method.
You are required to prepare Machinery Account and P Ltd. Account in the books of ABC
Ltd. Workings notes will form part of the answer.
(Ans: Profit on Surrender 14,771)

TOPIC 4: PARTIAL REPOSSESSION

Question 16 (ICAI Study Material) Pg no._____

X Ltd. purchased 3 milk vans from Super Motors costing ₹ 75,000 each on hire purchase
system. Payment was to be made: ₹ 45,000 down and the remainder in 3 equal
instalments together with interest @ 9%. X Ltd. writes off depreciation @ 20% on the
diminishing balance. It paid the instalment at the end of the 1st year but could not pay the
next. Super Motor agreed to leave one milk van with the purchaser, adjusting the value
of the other two milk vans against the amount due. The milk vans were valued on the
basis of 30% depreciation annually on written down value basis. X Ltd. settled the seller’s
dues after 3 months. You are required to prepare the relevant accounts in X Ltd.’s books.
(Ans: Value of Goods Repossessed 73,500 and Loss on Surrender 22,500)
Question 17 (RTP May 2018) / (RTP Nov 2019) Pg no._____
Srikumar bought 2 cars from ‘Fair Value Motors Pvt. Ltd. on1.4.2019 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 31.3.2022 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

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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:
Calculate the cash price of the cars and the interest paid with each instalment.
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.
(Ans: Cash Price 18,00,000; Value of Goods Repossessed 1,94,400 and Loss on Surrender
1,85,288)
Question 18 (Inter May 2019) (10 Marks) Pg no._____
M/s Amar bought
) six Scooters from M/s Bhanu on 1st April, 2019 on the following terms:
Down payment ₹ 3,00,000
1st instalment payable at the end of 1st year ₹ 1,59,000
2nd instalment payable at the end of 2nd year ₹ 1,47,000
3rd instalment payable at the end of 3rd year ₹ 1,65,000
Interest is charged at the end of 10% per annum.
M/s Amar provides depreciation @ 20% per annum on the diminishing balance method.
On 31st March, 2022 M/s Amar failed to pay the 3rd instalment upon which M/s Bhanu
repossessed two Scooters. M/s Bhanu agreed to leave the other four Scooters with M/s
Amar and adjusted the value of the repossessed Scooters against the amount due. The
Scooters taken over were valued on the basis of 30% depreciation per annum on written
down value.
The balance amount remaining in the vendor’s account after the above adjustment was
paid by M/s Amar after 5 months with interest @ 15% per annum.
M/s Bhanu incurred repairing expenses of ₹ 15,000 on repossessed scooters and sold
scooters for ₹ 1,05,000 on 25th April, 2022.

You are required to:

Calculate the case price of the Scooters and the interest paid with each instalment.
a. Prepare Scooters Account and M/s Bhanu Account in the books of M/s Amar.
b. Prepare Goods Repossessed Account in the books of M/s Bhanu.
(Ans: Cash Price 6,90,000; Value of Goods Repossessed 78,890 and Loss on Surrender
38,870)
Pg no._____
Question 19
Y Ltd. sold 3 machineries for a total cash sale price of ₹ 6,00,000 on hire purchase basis
to X on 1.1.2019. the terms of agreement provided for 30% as cash down and the balance
of the cash price in three equal instalments together with interest at 10% p.a. compounded
annually. The instalments were payable as per the following schedule:
1st instalment on 31.12.2020; 2nd instalment on 31.12.2021 and 3rd instalment on
31.12.2022. X paid the 1st instalment on time but failed to pay thereafter.
On his failure to pay the second instalment, Y Ltd. repossessed two machineries and
valued them at 50% of the cash price. X charges 10% p.a. depreciation on straight line
method.
Required: Prepare necessary ledger accounts in the books of X for 2019-2021.
(Ans: Value of Goods Repossessed 2,00,000 and Loss on Surrender 80,000)

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Question 20 Pg no._____
Girish Transport Ltd. purchased from NCR Motors, 3 Electric Rickshaws costing ₹ 60,000
each on the hire purchase system on 01.01.2019. Payment was to be made ₹ 30,000 down
and the remainder in 3 equal instalments payable on 31.12.2019, 31.12.2020 and 31.12.2021
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. 31.12.2019 but could not pay next on
31.12.2020. NCR Motors agreed to leave one e–rickshaw with the Purchaser on 31.12.2020
adjusting the value of the other two e–rickshaws against the amount due on 31.12.2020.
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 year
2019, 2020 and 2021.
(Ans: Value of Goods Repossessed 58,800 and Loss on Surrender 18,000)
Question 21 (RTP Nov 2018) (RTP May 2019) (RTP Nov 2020) Pg no._____
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 their hire vendor.
iv. Profit or loss of cars repossessed, when sold by the hire vendor.
(Ans: 1,96,000; 1,28,000; 60,000; 36,000)
Question 22 (RTP May 2021) Pg no._____
What is meant
) by repossession? What is the treatment for repossession in the books of
Hire Purchaser?

TOPIC 5: MISC. QUESTIONS

Question 23 (ICAI Study Material) Pg no._____
A firm acquired two tractors under hire purchase agreements, details of which were as
follows:
Date of Purchase Tractor A Tractor B
st
1 April 2020 1st Oct 2020
Cash price 14,000 19,000

Both agreements provided for payment to be made in twenty-four monthly instalments

(of ₹ 600 each for Tractor A and ₹ 800 each for Tractor B), commencing on the last day
of the month following purchase, all instalments being paid on due dates.

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On 30th June, 2021, Tractor B was completely destroyed by fire. In full settlement, on 10th
July, 2021 an insurance company paid ₹ 15,000 under a comprehensive policy. Any
balance on the hire purchase company’s account in respect of these transactions was to
be written off.
The firm prepared accounts annually to 31st December and provided depreciation on
tractors on a straight-line basis at a rate of 20 per cent per annum rounded off to nearest
ten rupees, apportioned as from the date of purchase and up to the date of disposal.

You are required to record these transactions in the following accounts, carrying down
the balances on 31st December, 2020 and 31st December, 2021:
(a) Tractors on hire purchase.
(b) Provision for depreciation of tractors.
(c) Disposal of tractors.
(Ans: Loss on Disposal 1,150)

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