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1. STUDY MATERIAL
COURSE : I B.Com
SEMESTER : II
SUBJECT : FINANCIAL ACCOUNTING
UNIT : V
SUBJECT CODE: 18BCO23C
UNIT – V Hire Purchase and Installments Systems (excluding hire purchase trading
accounts and hire purchase stock and debtors system
Hire Purchase and Installment Purchase Systems
Hire purchase and installment systems are responsible for bringing high value durable goods like
cars, Televisions into the reach of middle class and lower middle class people. These systems
have revolutionized the world of commerce.
Hire Purchase System Definition:
According to the Hire Purchase Act 1972 Section 2 (c) " Hire purchase agreement is an
agreement under which goods are let on hire and under which the hirer has an option to purchase
them in accordance with the terms of the agreement and includes an agreement under which
(i) Possession of goods is delivered by the owner thereof to a person on condition that such
person pays the agreed amount in periodical installments.
(ii) The property in the goods is to pass to such person on the payment of the last of such
installments.
(iii) Such person has a right to terminate the agreement at any time before the property so passes.
As Per Section 4 of the Hire Purchase Act 1972, every hire purchase agreement must state:
• The hire purchase price of the goods to which the agreement relates.
• The cash price of the goods, that is to say, the price at which the goods may be purchased
by the hirer for cash.
• The date on which the agreement shall be deemed to have commenced.
• The number of installments by which the hire purchase price is to be paid, the amount of
each of those installments and the date or the mode of determining the date, upon which
it is payable and the person to whom and the place where it is payable.
• The goods to which the agreement relates, the manner sufficient to identify them.
Some important terms in the hire purchase system
l. Cash price: This is the retail price of the articles at which they can be purchased immediately
for cash.
2. Hire purchase price: is the total amount payable by the buyer, in agreed installments for the
goods purchased. This price includes cash price and interest.

2. 3. Interest: This is the additional amount apart from the cash price payable by the buyer as
compensation for postponed payments.
4. Hire or Installment: This is the amount payable by the buyer periodically. The installments
may be equal or different, depending on agreement.
5. Down payment: This is the advance payable by the buyer while signing the hire purchase
agreement. It is also a part of the hire purchase price.
6. Hirer: The buyer of the goods on hire purchase basis.
7. Hire vendor or owner: The seller of the goods on hire purchase basis.
Main features of Hire purchase system.
• The hirer or buyer gets possession of the goods on signing the hire purchase agreement
and he has the right to use them-
• The ownership of the goods continues to be with the seller or hire vendor. The buyer gets
ownership of the goods on payment of the last installment.
• The hirer has the duty to keep the goods in good condition and take reasonable
precautions for their safety till the last installment is paid.
• Each installment is treated as hire charges.
• The hirer has the option to return the goods before the last installment is paid.
• The hire vendor can repossess the goods if the buyer fails to pay any installment on the
due date. However, permission of the court is needed for repossession, depending on the
value of the goods and number of installments paid.
• If goods are repossessed, the value of goods on that date and the installments paid are
added and the total hire purchase price is reduced. The balance is payable by the hire
vendor to the hirer.
Installment purchase system or deferred installment system:
In installment purchase system also, an agreement is entered into by the seller and buyer. An
advance or down payment is paid and possession as well as Ownership in the goods is
transferred to the buyer. The buyer agrees to pay the balance of amount due in a specified
number of installments along with agreed rate Of interest. If buyer fails to pay any installment,
the seller cannot repossess the goods. He can sue the buyer in a court for recovery of the dues.
Distinction between Hire purchase and Installment Systems
S.N0 Basis Hire purchase System Installment System
l . Nature of agreement It is an agreement of hiring
with option to buy.
It is an agreement of sale.
2. Transfer of ownership Ownership is transferred on
payment of final
installment.
Ownership is transferred on
signing of the agreement.
3. Names of the parties The buyer is called Hirer
and seller as Owner or Hire
vendor.
The parties involved are
called buyer and seller.

3. 4. Relationship The relationship of hirer and
hire vendor is that of Bailor
and Bailee
The relationship between
the buyer and seller is that
of a debtor and creditor till
last installment is paid.
5. Risk of loss The Hirer is not responsible
for any loss of the goods if
he has taken reasonable
precautions.
The buyer is responsible
for loss goods because he is
the owner.
6 Right of sale The Hirer cannot sell the
goods till he gets ownership.
The buyer has the right to
sell the Goods even before
installments are paid.
7. Repossession of goods The Hire vendor can
repossess the goods if
installment is not paid
Seller cannot repossess the
goods. He can sue the
buyer for dues.
8. Termination of agreement The Hirer can terminate the
agreement by returning the
goods.
The agreement cannot be
terminated.
9. Installment Each installment includes
hire charges and part
payment of the cash price.
Each installment includes
interest and part payment
of cash price.
10. Governing Hire purchase Act 1972
governs the Hire Purchase
Agreement
Installment purchase is
governed by Sale of Goods
Act.
Accounting Treatment for Hire purchase system:
The method of recording hire purchase transactions in the books of the Hire vendor depends
on the value of the goods involved. The method of recording the transactions in the books of thé
Hirer is the same irrespective of the value of the goods.
1. Accounting Treatment of High value goods:
High value goods like trucks, costly machinery, etc., can be placed under this category.
Books of Hire Purchaser or Hirer
There are two methods of recording the hire purchase transactions in Hirer's books.
• Asset Accrual Method and
• Credit purchase with Interest Method.
In the asset accrual method, the asset is deemed to be acquired gradually on the basis of cash
price paid.
In the credit purchase with interest method, the asset is deemed to be acquired as soon as it is
received into possession.
The following are the entries to record different transactions under both the methods.
Date or
year
Entry In asset accrual method Entry In credit purchase with interest method
On the
date of
1. For down payment payable
Asset A/c Dr.
1. For cash price of asset purchased
Asset A/c

4. purchas
e
To Hire vendor's A/c
[Being down payment payable]
2. For paying down payment
Hire vendor's A/c Dr.
To Cash A/c
[Being payment of down payment]
To Hire Vendor's A/c
[Being cash price of asset purchased on hire
purchase agreement]
2. For paying down payment
Hire Vendor's A/c
To cash A/c
[Being payment of down payment]
On the
date of
1st
installm
ent
3. For the amount of first installment
Asset A/c (Cash price in the installment) Dr.
Interest A/c (Interest in 1st installment) Dr.
To Hire Vendor's A/c
[Being 1st installment payable]
4. For payment of 1st installment
Hire Vendor's A/c Dr.
To Cash A/c
[Being payment of installment)
(For 2nd, 3rd etc., installments also,
entries 3 and 4 are repeated.)
3. For interest included in first installment
Interest A/c
To Hire Vendor's A/c
[Being interest payable with 1st installment]
4. For payment of 1st installment
Hire Vendor's A/c
To Cash A/c
[Being payment of installment]
(For 2nd, 3rd installments etc., also, entries 3
and 4 are repeated)
At the
end of
the
Accoun
ting
year
5.. For Depreciation of the asset
Depreciation A/c Dr.
To Asset A/c
[Being depreciation on the asset]
6. For closing depreciation and
interest accounts
Profit and loss A/c Dr.
To Depreciation A/c
To Interest A/c
[Being transfer of depreciation and interest]
5. For Depreciation of the asset
Depreciation A/c Dr.
To Asset A/c
[Being depreciation on the asset]
6. For closing depreciation and interest
accounts.
Profit & loss A/c Dr.
To Depreciation A/c
To Interest A/c
[Being transfer of depreciation and interest]
Books of Hire Vendor
The following are the journal entries in hire vendor's books for goods of high value sold.
1. When goods are sold on hire purchase agreement
Hire purchaser's A/c Dr. (Cash price)
To Hire sales A/c
[Being cash price of goods sold on hire purchase]
2. When down payment is received:
Cash A/c Dr.
To Hire purchaser's A/c
[Being receipt of down payment]

5. 3.On the date of1st installment for interest receivable
Hire purchaser 's A/c Dr.
To interest A/c
[Being interest receivable with I st installment)
4. For receiving the amount of 1st installment
Cash A/c Dr.
To Hire purchaser's A/c
[Being receipt of Ist installment)
Note: Entries 3 and 4 are repeated for every installment.
5. At the end of the accounting year
For transfer of interest to Profit and Loss A/c
Interest A/c Dr.
To Profit and Loss A/c
[Being transfer of interest to P & L A/c]
Depreciation is not recorded by the hire vendor, though legally the goods sold belong to him
because he is not using them.
CALCULATION OF INTERFST
The hire purchase price is always greater than the cash price. It includes interest payable over
and above the price of the goods to compensate the seller for the sacrifice he has made by
agreeing to receive the price by installments and the risk that he thereby undertakes. Interest is
the charge for the facility to pay the price for the goods by installments after they have been
delivered. The rate of interest is generally higher than that is payable in respect Ofan advance or
a loan since it also includes a charge to cover the risk that the hirer may fail to pay any of the
installments and in such an event, the goods may have to be taken back into possession in
whatever condition they are at that time. A separate charge on this account is not made as that
would not be in keeping with the fundamental character of the hire purchase sale. However, in
accounting system, the excess of total hire purchase price over the total cash price is treated as
the payment for interest.
Since each installment includes interest also which is financial gain or loss, it is essential to
know the different methods of ascertaining interest.
Interest included in each installment can be ascertained by making necessary calculations
under the following circumstances:
• When the rate of interest, the cash price and the installments are given

6. • When the rate of interest is not given
• When the total cash price is not given.
• When the installment price is not given.
• When cash price is calculated by annuity method.
When the rate of interest, the cash price and the installments are given:
Under this method, the interest is to be calculated on the outstanding balance of the cash price
at the stipulated rate. When interest component is deducted from installment, the balance
represents the amount paid in reduction of cash price. This amount is deducted from the cash
price to facilitate the calculation of interest for the next period. Since the installments are in
round sums of money, the interest for the final year should be taken as the difference between the
cash price outstanding at the end of that period and the amount of installments.
When total cash price and installments are given but rate of interest is not given:
When the rate of interest is not given, the interest included in each installment will be
calculated on the basis of the hire purchase price outstanding in the beginning of each year. The
following is the process of ascertaining interest included in various installments:
When rate of interest and installments are given but total cash price is not given
When the amount of each installment which includes interest is given and rate of interest is
also given, cash price is found out in the following manner:
(a) First of all find out cash price of the last installment.
Amount of last installment x Rate of interest
100 + Rate of interest
Interest included in the last installment.
This interest is deducted from last installment and cash price of the last installment is found out.
(b) (Cash price of the last installment x Rate of interest
+ amount of prior installment) 100 + Rate Of interest
When the interest is deducted from prior installment, cash price of the prior installment is found
out.
(c) The same process may be repeated for earlier installments
When rate of interest and total cash price are but the installment price is not given.
In this method is also, the interest is to be calculated on the outstanding balance of the cash
price at the stipulated rate. Then cash price paid is deducted from the total cash price and interest
is calculated for the next period falling between the dates of payment of first installment and
second installment. This process is repeated till the payment of last installment. The installment
price is calculated by adding interest with cash price of each installment. (Refer Illustration 4).
Calculation of cash price by Annuity method:

7. When in place of cash price, hire purchase price and annuity rate are given, the cash price is
calculated by multiplying the amount of installment with the annuity factor given and adding
down payment to the product. Then interest is calculated. (Refer illustration 5)
Default and Repossession
Default:
If the hire purchaser fails to make payment ofany installment, it is called 'default'. Unless he
regularises the matter, the hire vendor can take back the goods into his possession after default.
Repossession:
The hire vendor has the right to take away the goods sold on hire purchase in the event of
default made by the hire purchaser. As per Hire Purchase Act 1972 goods of small value or even
goods of higher value when few installments are paid can be repossessed without court's
permission. A court order is needed to repossess goods of higher value on which larger number
of installments are paid.
The hire vendor can repair or recondition the repossessed goods and sell them to anyone else.
Types of repossession
Complete Repossession: The hire vendor may take away all the goods on which there is default
of installment.
Partial Repossession: The hire vendor may take away only a portion of the goods on which
there is default of installments.
Accounting treatment varies in the books of both the hire vendor and hire Purchaser for each of
the types of repossession.
(a) Complete repossession of goods: When complete repossession of goods takes place, the
ledger accounts in the books of hire purchaser and the hire vendor are fully closed as far as the
hire purchase transaction is concerned.
Books of Hire vendor
(1) On the date of default of installment, entry for interest is passed. The hire purchaser's account
is closed. Any balance is transferred to repossessed goods account.
(2) The repossessed goods may be reconditioned by spending necessary amount which is also
debited to repossessed goods and crediting cash.
Books of Hire purchaser
(1) On the date of default, entry for interest and for depreciation upto date on the asset must be
passed.
(2). Hire vendor's account is to be closed and any balance is transferred to the asset account.

8. (3) Asset account is closed and any balance is transferred to profit and loss account which is the
loss due to repossession of the asset.
(b) Partial repossession
When there is default on any installment, the hire vendor may repossess the goods partially.
This may be due to negotiation with the hirer who may agree to make some payment in future.
The hire purchaser might have depreciated the asset as per his assessment of the rate of
depreciation. The hire vendor revalues the asset as per his own norms. Thus, there can be
difference in the rates of depreciation charged by the hirer and the hire vendor.
While solving examination problems, it is essential to ascertain the value of goods at the time
of repossession as per the hire purchaser's rate of depreciation and also the hire vendor's rate of
depreciation.
Books of Hire vendor
(1) Entry for interest upto the date of default is passed.
(2) Repossessed goods as per hire vendor's valuation are credited to hire purchaser's account and
debited to 'Repossessed goods A/c'.
(3) The hire purchasers account is balanced and balance is carried down.
(4) Repossessed goods may be repaired and sold later on.
Books of Hire purchaser
(l) Entries for interest and depreciation on the asset are passed upto date,
(2) Hire vendor's A/c is debited and asset A/c is credited with the value Of asset taken away as
per hire vendor's valuation.
(3) In the asset account, the remaining asset which is not taken away is shown as closing balance.
This is at a value as per hire purchaser's rate of depreciation.
(4) The asset account is balanced. Any balance is loss due to repossession and is transferred to
Profit and Loss Account.
Installment Purchase System
Meaning: Under installment purchase system, the property in goods passes to the purchaser
immediately on signing the contract. In short, sale is outright but payment is made by different
installments. The amount of installment and the interest payable are determined at the time of
signing the contract. The seller delivers the goods to the buyer immediately after signing the
contract. Since the ownership is transferred, the seller has no right to repossess the goods even if
the buyer makes default in the payment of any installment. This is also referred to as deferred
installment system.
Accounting Treatment — Books of Buyer
The following journal entries are to be passed in the books of the buyer :
First Year

9. l. When an asset is purchased :
Asset A/c Dr. (with cash price)
Interest Suspense A/c Dr. (with total amount of interest for all the years)
To Vendor's A/c (with total installment purchase price)
2. When the Down Payment is made
Vendor's A/c Dr.
To Bank/Cash A/c
3. For Interest due at the end of the year
Interest A/c
To Interest Suspense A/c
4. For the Payment of Installment :
Vendor's A/c
To Bank A/c
5. For Depreciation
Depreciation A/c Dr.
To Asset A/c
6. For transferring Depreciation and Interest Accounts
Profit & Loss A/c Dr.
To Interest A/c
To Depreciation A/c
Note : Entries (3), (4), (5) and (6) will repeated in subsequent years.
Accounting treatment — Books of Vendor
The following Journal entries are to be passed in the books of the vendor.
First Year
1. When goods are sold
Buyer's A/c Dr. ( with total price)
To Sales A/c ( with cash price)
To Interest Suspense A/c ( with total interest for all the years)
2. On receipt of down payment
Bank A/c
To Buyer's A/c
3. For Interest due on installment at the end of the year
Interest Suspense A/c
To Interest A/c
4. For receipt of the amount of installment
Bank A/c
To Buyer's A/c
5. For transferring Interest A/c

10. Interest A/c
To Profit & Loss A/c
Note: Entries from (iii) to (v) will be repeated in subsequent years.
PROBLEMS
Methods of Calculation of interest
When rate of interest, total cash price and installments are given
1. On I -l -86, X purchased machinery on hire purchase system. The payment is to be made Rs.
4,000 down (on signing of the contract) and Rs. 4,000 annually for Years. The cash price of the
machinery is Rs. 14,900 and the rate of interest is 5%. Calculate the interest in each year's
installment.
2. Raman purchases a motor car from Bharathan whose cash price is Rs.56,OOO on 1.1.93. Rss
15,000 is paid on signing the contract and the balance is to be paid in three equal annual
installments of Rs. 15,000 each. The rate of interest is 5% p.a. Calculate the amount of interest
included in each installment.
3. Mohan purchases a car on hire purchase system. The total cash price of the car is Rs.15,980,
payable Rs.4,000 down and in three installments of Rs.6,OOO, Rs.5,OØ and Rs. 2,000 at the end
of first, second and third years respectively. Interest is charged at 5% per annum. You are
required to calculate interest paid by hirer, each yean
When Rate of interest is not given
4. X purchased machinery under hire purchase agreement from Y. The cash price of the
machinery was Rs. 15,500. The payment as to be made as follows :
On signing the agreement Rs.3,000
First year end5,000 Second year end Rs. 5,000
Third year endRs.5,000 Calculate interest for each year.
5. Arul purchased machinery under the hire purchase system from Mr. Balu. The cash price of
the machinery was Rs. 15,000. The payment for the purchase is to be made as follows: On
signing the agreement Rs. 3,000; end of the first year Rs. 5,000; end of the second year Rs.
5,000; end of the third year Rs. 5,000. Calculate the amount of interest included in each
installment.
6. A television set cash price of which is Rs. 18,000 is sold on hire purchase system for
Rs.20,000 payable in 4 quarterly installments of each. The first payment is made at the end of the
1st quarter. Show how interest is calculated.
When Cash Price is not Given :

11. 7. Calculate cash price of a machine from the following information:
Down payment Rs.10,000
4 annual installments at the end of each year Rs.10,000
Rate of interest 5% p.a.
8. Mr. X purchased a cycle on hire purchase for Rs. 1,000 to be paid as follows:
On signing the agreement Rs.120
At the end of the first year Rs.170
At the end of the second year Rs.160
At the end of the last year Rs.550
The vendor charged interest at 10 % p.a on the cash value remaining unpaid each year. Calculate
the cash value of the cycle.
9. Mr. Anbu purchased a machine by hire purchase system for Rs.30,000 to be paid as follows:
Down payment5,000
At the end of the first year Rs.7,000
At the end of the second year Rs.6,500
At the end of the third year Rs.6,000
At the end of the fourth year Rs.5,500
Interest is charged on the value at 10 % p.a. At what value should the machine be capitalised ?
10.. 'A' purchases two trucks on hire purchase system. He pays Rs. 50,000 down and Rs. 60,000
at the end of 2nd year, 4th year and 6th year. Interest is charged by the vendor at 10% with two
yearly rests on unpaid balance. Calculate interest paid with each installment.
11. 'A' purchases a bus on hire purchase from 'B' for Rs. He pays Rs. 50,000 each at intervals of2
years. 'B' charges interest at 10% p.a. at yearly rests. Calculate the amount of cash price of the
bus.
12. An asset is purchased under hire purchase agreement which provides for five half yearly
installments of Rs. 6,000 each, the first installment being due on July 1, 1981. Assuming the
applicable rate of interest is 10% p.a, calculate the cash value of the machine.
When installment amounts are not given
13. K.A.S Transport Ltd. purchased from Delhi Motors 3 trucks costing Rs. 50,000 each hire
purchase system. Payment was to be made Rs. 30,000 down and the remainder in three equal
annual installments together with interest at 9%. Calculate interest for each year.

12. 14. A Machine costing Rs. 50,000 was purchased on hire purchase basis. Rs. 10,000 was paid on
signing the agreement and the balance in four equal installments of Rs. 10,000 each annually
with interest at 5%. Calculate interest and show the amount payable on each installment.
Calculation of cash price by annuity method
15. Mr. X purchased a motor car on hire purchase system payable Rs. 40,000 annually for 10
years. The rate of interest is 5%. Given the present value ofan annuity ofRe.l for 10 years at 5%
is Rs. 7.7217, calculate cash price.
Repossession :
16. Ram purchased a truck under H.P System on I -4-89 for Rs. 5,00,000. He provided 20%
depreciation under W.D.V. method. He had paid down payment and 1st annul installment but
failed to pay second annual installment. The vendor has taken away the truck at Rs. 2,81,250.
Compute the loss due to repossession assuming the accounts are closed on 3 1st March.
17. Ajay purchased four Cars costing Rs. each on H.P. System. The H.P. price is payable 25%
down and the balance in three annual installments. After having paid down payment and first
installment, he could not pay second installment and seller took possession of3 cars at an agreed
value to be calculated after depreciating cars at 25% p.a. on W.D.V. method. Compute the value
of3 Cars taken away by the vendor.
18. A company purchased two machines of Rs. each on H.P. System. The company writes off
depreciation at 10% p.a. under W.D. V. method. The company could not pay the second annual
installment. The vendor left one machine with the company adjusting the value of the other
against amount due taking the machine at 20% depreciation under W.D. V. method. Compute the
value of one machine left with the buyer.
19. From the following data. Prepare Interest suspense A/c under Installment purchase system:
Interest included in 1st installment Rs.1,50,000
Interest included in 2nd installment Rs.1,00,000.
Interest included in 3rd installment Rs. 50,000
Journal and Ledger in the books of Buyer and Seller
20. 'M' Ltd. sold a lorry to Arun on Hire purchase system. The cash price was Rs. 7,45,000.
Rs.2,00,000 was to be paid on delivery and the balance in three installments of Rs.2,00,000 each
at the end of each year. 'M' Ltd. charged interest of 5% p.a. Arun depreciates the lorry at 10% per
annum on reducing balance Prepare necessary ledger a/cs in the books of Arun.

13. 21. The Madras Trading Co. purchased a motor car from Bombay Motor Co. on hire purchase
agreement on 1.1.80, paying cash Rs. 10,000 and agreeing to pay further three installments of
Rs. 10,000 each on 3 1 st December each yean The cash price of the car is Rs.37,250 and the
Bombay Motor Co. charges interest at 5% p.a.
The Madras Trading Co. writes off 10% p.a as depreciation on the reducing balance method.
Journalise the above in the books of both the parties.
22. Rakesh purchased a motor car on hire purchase system. The total cash price of the car is Rs.
15,980 payable Rs. 4,000 down and three installments of Rs.6,000, Rs.5,000 and Rs.2,000
payable at the end of first, second and third years respectively. Interest is charged at 5% p.a.
You are required to prepare ledger accounts in the books of both the parties. Rate of depreciation
is 10% on straight line method. Calculations are to be made to the nearest rupee.
23. Mr. Gupta purchased machinery under hire-purchase agreement from Mr. Pankaj The cash
price of the machinery was Rs. 15,500. The payments for the purchase, are to be made as under :
On signing the agreement Rs. 3,000; First year end Rs 5,000; Second year Rs. 5,000; Third year
end Rs. 5,000.
Make necessary ledger accounts in the books ofboth the parties charging depreciation @ 10%
on diminishing balance method.
24. On 1-1-93 Ramasamy company purchased a car from Alagappan and company. At the time
of agreement a sum of Rs. 24,000 was paid out of cash down price of the cc and the balance
would be payable in 3 equal annual installments with interest at 5% p.a. The amount of last
installment including interest was Rs. 33,600. Depreciation was to be provided at 10% p.a. on the
reducing balances.
Prepare
(a) Motor Car Account
(b) Algappan A/c
in the books of Ramasamy company.
25. Mr. Raman purchased a T. V. on Hire Purchase on the following terms:
Rs. l, 200 to be paid on signing the agreement.
Rs. 1,700 at the end of the first year
Rs. 1,600 at the end of the second year
Rs. 5,500 at the end of third and last year.
The hire vendors charged interest at 10% per annum on cash value of the TV Mr.Raman wished
to provide depreciation at 10% p.a. on the diminishing balance method' Write up the necessary
ledger accounts in the books of both the parties.

14. 26. 'X'Co Ltd. purchased lorries from Sugal & Co. on hire-purchase system on 14-95, made Rs.
2,98,500 down and Rs. 3,00,000o annually for three years.the installments are required to be paid
on March 31each year. The cash price of the lorries purchased was Rs.9,30,000. SugaJ & Co.
charged interest@20% annum. •X' Co. Ltd. provided depreciation on lorries@ 20% p.a. on the
diminishing balance method The books of accounts are closed on March 3 1, every year.
Prepare necessary journal entries and Ledger accounts in the books of 'X' Co.
Complete Repossession
27. Mr. A purchased a machine from B Ltd. for Rs. 5,60,000; payment to be made Rs.1,50,000
down and three installments of Rs. 1,50,000 each at the end of each year. He depreciates the
asset at 10% per annum on written down value method. Because of financial difficulties, Mr. A
after having paid down payment and first installment at the end of the first year, could not pay
second installment and the seller took possession of the asset.
Open ledge account in the books of both parties to record the transactions.
28. Mt Balu purchased a machinery from Kumar & Co., on hire-purchase system on 1-1-
1995.,The cash price of the machine was Rs. 1,00,000, Rs. 20,000 to be paid at the time of taking
delivery and balance by four installments of Rs. 20,000 plus interest @5% on yearly balances.
Balu failed to pay the installment due on 31-12-1996. Kumar & Co. took possession Of the
machinery and valued the same in their books after charging depreciation @ 10% p.a. on
Reducing Balance method. In 1997 Kumar & Co. incurred Rs. 1,000 for reconditioning and re-
sold the machinery for Rs. 90,000.
Show the ledger accounts in the books of Mr. Balu and Kumar & Co.
29. A machinery was purchased on Hire Purchase basis by agreeing to pay four annual
installments of Rs. 4,230 at the end of each year commencing from the date of the agreement.
Interest is charged@5% and is included in annual payments of Rs. 4,230 Show Machinery
account and Hire Vendor account in the books of purchaser when he commits a default in paying
third installment and the asset was repossessed. Purchaser provides depreciation on the
Machinery @ 10% p.a. on S.L.M
30. X Ltd purchased a piece of Machinery on 1st January 1980 on the hire purchase system. The
cash price of the machinery was Rs. 29,800. Terms of payment were Rs. 8,000 half yearly over
two years, the first payment to be made on 30th June 1980. Rate of interest was 6% p.a. X Ltd
wrote off 10% depreciation under W. D. V. method and closed its books on 30th June every
year. It could not pay the installment due on 30th June 1981 and as a consequence, the hire
vendor took possession of the machinery. Give the Machinery Account and show the loss
suffered by X Ltd.

15. 31. Mohan purchased on I st October 1992, a machine on hire purchase system. The cash price
was Rs. 20,000. Payment was to be made as to Rs. 5,000 down and Rs. 4,000 annually for five
years. The machine was depreciated at 15% p.a. on diminishing value. The third annual
installment could not be paid and the vend r seized the machinery. Record the above transactions
in the books of Mohan assuming accounts are closed on 31 st Dec.
Partial Repossession
32. Balaji & Co. purchased from the vendor two machines of Rs. 10,500 each on hire purchase
system. The payment was to be made Rs. 6,000 down and the remainder in three equal
installments of Rs.5,000 each together with interest at 5% p.a. BalaJi & Co. writes off
depreciation at 10% p.a. on written down value. They could not pay their second installment.
After negotiations, it was agreed that vendors would leave one plant with the purchaser,
adjusting the value of the other against amount due treating the machines at 20% depreciation on
diminishing balance.
33. Kumar purchased 2 machines costing Rs. 80,000 each from Peter on 1-1-1994 on hire-
purchase system. The terms were as follows :
Payment on delivery Rs. 20,000 for each machine, remainder in 3 equal installments and also
separately the interest at 10% p.a. to be paid at the end of each year.
Kumar writes-off 25% depreciation each year on the diminishing balance method. Kumar paid
the installments due on 31-12-1994 and on 31-12-1995 but could not pay the final installment.
Peter re-possessed one machine on 3 1 - 12-1996 adjusting its value against the amount due. The
re-possession was done on the basis of30% depreciation on the diminishing balance method,
assuming that the balance, still lying due, will be paid off next year in 1997.
Write up ledger accounts in thé books of Kumar showing the above transactions, upto 31-12-
1996.
34. Laha Transport Ltd, purchased from Roy Auto Distributors 3 trucks costing Rs. 50,000 each
on the hire purchase system. Payment was to be made Rs. 30,000 down and the remainder in 3
equal installments together with interest@9% p.a. Laha Transport writes off depreciation at 20%
p.a. on the diminishing balance. It paid the installment due at the end of first year but could not
pay the next. Roy Auto Distributors agreed to leave one truck with the purchaser, adjusting the
value of the other 2 trucks against the amount due. The trucks were valued on the basis of 30%
depreciation annually. Prepare the necessary ledger accounts in the books of Laha Transport Ltd.
for 2 years. Show Journal entries for all the transactions taking place on the date of default. Also
show the necessary accounts in the books of the hirers.

16. 35. On 1-1-1994, X, a television dealer, bought 5 television sets from Superfine Television
Co., on hire purchase. The cash price of each set was Rs. 20,000, it was agreed that Rs. 25,000
should be paid immediately and the balance in three installments of Rs. 30,000 each at the end of
each year. The Television Co., charges interest@ 10% p.a. The buyer depreciates television sets
at 20% p.a. on the diminishing balance method.
X paid cash down and two installments but failed to pay the last installment Consequently,
the Television Co., repossessed three sets, leaving two sets with the buyer and adjusting the
value of 3 sets against the amount due. The sets repossessed were valued on the p.a. on the
written down value. The sets repossessed were sold by the Television Co., for Rs. 30,000 after
necessary repairs amounting to Rs. 5,000. Open necessary ledger accounts in the books of both
the parties.
36. Ramola purchased four machines of Rs. 14,000 by Hire Purchase system. The hire purchase
price for all the four machines was Rs.60,000 to be paid as Rs. 15,000 down and 3 installments
ofRs.15,000 each at the end Of each year. Depreciation is written off at 10% per annum on the
straight-line method.
Down payment and first installment were paid. On the default of second installment vendor
took possession of three machines, leaving one machine with buyer. The machines were taken by
the vendor at a depreciated value of 20% per annum under written down value method. Vendor
has spent Rs. 1,200 on repairs and sold the three machines for Rs. 35,000.
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