Topic 2 hire_purchase

BKAF3063 A141 1
Accounting for
Hire Purchase
Topic
2

BKAF3063 A141 2
Chapter Outline
☞ Procedures and rules under Hire Purchase Act 1967.
 Definition
 hire purchaser rights
 seller’s right
☞ Accounting by purchaser/hirer:
 recognition of interest expense
 repossession
☞ Accounting by seller/owner:
 recognition of interest revenue and gross profit
 repossession
☞ Disclosure requirements
.

BKAF3063 A141 3
Learning Outcomes:
By the end of this chapter, students should be
able to:
 Explain the nature of hire purchase
 Journalize the entry using gross method
 Explain the treatment for hire purchase in
different situations
 Explain the disclosure requirements

BKAF3063 A141 4
Definition
Hire Purchase Act 1967:
“Hire purchase agreement” includes a letting of goods with an
option to purchase and an agreement for the purchase of goods by
instalments.
Legal view:
Hire Purchase is a system of acquiring goods on credit whereby
The seller of the goods is regarded as the dealer, the purchaser is
regarded as the hirer and the finance company as the owner.
www.lawyerment.com.my

BKAF3063 A141
5
Hire-Purchase Act 1967
☺ Hirer:
- The person who takes goods from the owner under a
hire-purchase agreement.
☺ Owner:
- a person who lets a goods to a hirer under a hire-purchase
agreement.
☺ Hire purchase price:
- the total sum payable by the hirer under a hire-purchase
agreement in order to complete the purchase of goods.
☺ Minimum deposit:
- no minimum deposit prescribed, it should not less than
one-tenth (10%) of the cash price of the goods.

BKAF3063 A141 6
☺ Details must be stated in agreement:
1) specify a date on which the hiring shall be deemed to have
commenced.
2) specify the number of instalments to be paid under the
agreement by the hirer.
3) specify the amount of each of instalments and the person whom
and the place at which the payments of these instalments are
to be made.
4) specify the time for the payment of each of those instalments.
5) contain a description of the goods sufficient to identity them.
6) specify the address where the goods under the hire purchase
agreement are.

BKAF3063 A141 7
☺ Among others, it must also set out in tabular form:
1) cash price
2) freight or delivery charges if any
3) vehicle registration fees
4) insurance
5) terms charges or interests
6) the annual percentage rate for terms charges
7) the balance originally payable under the agreement
8) the total amount payable.

BKAF3063 A141 8
 Only the following goods can be bought on hire purchase in
Malaysia :
1) all consumer goods
2) motor vehicles namely
3) invalid carriages
4) motor cycles
5) motor cars including taxi cabs and hire cars
6) goods vehicles where the maximum permissible laden weight
does not exceed 2,540 kilograms
7) buses, including stage buses

BKAF3063 A141 9
Hire-Purchase Vs Credit Sales
Hire-purchases Credit sales
Ownership of the
asset
 Not transferred  Transferred
Return of goods  Returnable  Not returnable
Repossession of
goods
 Yes  No

BKAF3063 A141 10
Accounting for
Hire-Purchase in
the book of Hirer

BKAF3063 A141 11
HP in the Book of Hirer
 Substance over form.
 Hire-purchase price = Cash price + interest
or
= Deposit + instalments amount
 Depreciation: cost over useful life of the asset.
 Method of recording:
1. Net Method
2. Gross Method
 Cost of asset = cash price

BKAF3063 A141 12
Hirer : Interest
 Interest rate: should not be more than 10% per annum.
 Total interest = hire-purchase price - cash price
 Matching principle applied: interest need to be amortised.
 Method of amortization:
1) Actuarial / effective interest / residual balance
2) Sum-of-the-years digit
3) Straight line

BKAF3063 A141 13
Hirer : Interest
Illustration 1:
On 1 July 2013, Abric Berhad purchased a machine under
hire-purchase agreement with Banker Berhad. The company
paid deposit of RM1,000 and further instalments of RM902
per month for 5 months starting from 31 July 2013. The cash
price of the machine is RM5,400. Interest rate charged is 6%
per year. The current effective interest rate is 0.83% per
month.

BKAF3063 A141 14
Hirer : Interest
Solution to Illustration 1:
HP price = cash deposit + instalments
= 1,000 + (902 x 5)
= RM5,510
Interest = HP price – Cash price
= 5,510 – 5,400
= RM110
Interest amortization?

BKAF3063 A141 15
Hirer : Interest
1. Effective interest method:
instalment Interest
(0.83%)
Principle Balance
1,000 4,400
1 902 36.52 865.48 3,534.52
2 902 29.34 872.66 2,661.86
3 902 22.09 897.91 1,781.95
4 902 14.79 887.21 894.74
5 902 7.26 894.74 0

BKAF3063 A141 16
Hirer : Interest
Illustration 2:
On 1 July 2013, Jobfast Berhad. purchased a delivery van
under hire-purchase agreement with Banker Berhad. The
company paid deposit of RM20,000 and further instalments of
RM5,200 per month for 6 months starting from 31 July 2013.
The cash price of the delivery van is RM50,000. Interest rate
charged is 8% per year.

BKAF3063 A141 17
Hirer : Interest
HP price = cash deposit + instalments
= 20,000 + (5,200 x 6)
= RM51,200
Interest = HP price – Cash price
= 51,200 – 50,000
= RM1,200
Interest amortization?

BKAF3063 A141 18
Hirer : Interest
2. Sum-of-the-years digit:
Amortization of interest:
Number for specific instalments x total interest
Total number of instalments
n(n+1) = 6(6+1) = 21
2 2
Inst. Calculation Interest (RM)
1 (6/21) x 1,200 343
2 (5/21) x 1,200 286
3 (4/21) x 1,200 229
4 (3/21) x 1,200 171
5 (2/21) x 1,200 114
6 (1/21) x 1,200 57

BKAF3063 A141 19
Hirer : Interest
2. Straight-line:
Amortization of interest = 1,200 / 6 = RM200 per month
Total interest .
Total number of instalments

BKAF3063 A141 20
Hirer : Net Method
Dr. Asset (cash price) 50,000
Cr. Account payable 50,000
(To record amount payable to seller – cash price)
Dr. Account payable 20,000
Cr. Cash 20,000
(To record payment of deposit)
Dr. Interest expense 343
Cr. Account payable 343
(To record interest expense)
Refer to Illustration 2: using sum-of-the-years method
Cr. Cash 5,200
(To record payment of instalment)
1 July 2013
31 July 2013

BKAF3063 A141 21
Hirer : Gross Method
Dr. Asset (cash price) 50,000
Deferred interest 1,200
Cr. Account payable 51,200
(To record amount payable to seller – hp price)
Cr. Cash 20,000
(To record payment of deposit)
Dr. Interest expense 343
Cr. Deferred interest 343
(To record interest expense)
Refer to Illustration 2: using sum-of-the-years method
Cr. Cash 5,200
(To record payment of instalment)
1 July 2013
31 July 2013

BKAF3063 A141 22
HP in the Book of Hirer
Situations:
1. HP complete as per contract.
2. Hirer fails to pay instalment
 defaults & repossession

BKAF3063 A141 23
Hirer:Default and Repossession
 S16 - Owner has a right to repossess asset if:
 S16(1): hirer fails to pay 2 instalments
consecutively or fail to pay last instalment.
 Notice should be given to hirer to notify about the
repossession (Schedule 4). Owner has the right to
repossess asset after 21 days of notification.
 S16(2): owner feel suspicious that asset will
be transferred to another place other than
place which stated in contract .

BKAF3063 A141 24
 S16A- If asset is returned within 21 days of
notification, the hirer would not bear any cost related
to the repossession, storage and other cost.
 S16(3): Alternatives given to hirer:
a) renew the contract; or
b)settle contract before maturity date; or
c) let owner to repossess goods.

BKAF3063 A141 25
a) renew the contract:
 Payment to be made:
instalment in arrears
(+) interest in arrears
(+) storage/custody/repair cost
(+) repossession cost
(+) redelivery cost

BKAF3063 A141 26
b) settle contract before maturity date:
Payment to be made:
Hire-purchase price xx
(-) (deposit + instalment paid) xx
(-) statutory rebate xx
(+) storage/custody/repair cost xx
(+) repossession cost xx

BKAF3063 A141 27
☞ Illustration 3:
On 1 January 2013, Shellix Berhad. purchased a drilling machinery under a
hire-purchase agreement with Fortune Berhad. The cash price of the
machinery is RM70,000 with estimated useful life of 10 years. The company
paid deposit of RM20,000 and further instalments of RM4,375 per month for
12 months starting from 31 January 20013. Interest rate charged is 5% per
year.
On 15 September 2013, Shellix Berhad received a notice to repossess by the
Fortune Berhad due to its failure to pay the last two instalments (July &
August). 21 days later, the company decided to make a payment to settle the
contract. The storage and repossession costs to be borne were RM200 and
RM350 respectively.

BKAF3063 A141 28
Payment to be made:
Hire-purchase price 72,500
(-) deposit + instalment paid 46,250
(-) statutory rebate 192
(+) storage/custody/repair cost 200
(+) repossession cost 350
26,608
20,000 + (4,375 x6)
3(3+1) / 2 x 2,500
12(12+1) / 2

BKAF3063 A141 29
☞ Solution to Illustration 3:
Journal entries:
Interest expense 481
Loss on hp settlement 550
Cr. Cash 26,608
Deferred interest expense 673
(6+5+4+3+2+1)/78 x 2,500
(6+5+4)/78 x 2,500

BKAF3063 A141 30
c) let owner to repossess goods:
 if:
Repossess good’s value
+ total paid
Total net payable>
hirer can claim the excess,
vice versa, hirer must pay
original unpaid balance
(hp price)
() statutory rebate
1. reasonable best price, or
2. price to pay by a new hirer by cash
minus: - repossession cost
- storage cost
- sales cost/written-off goods

BKAF3063 A141 31
Illustration 4:
Using the same information in Illustration 3:
On 10 September 2013, Shellix Berhad received a notice to
repossess by Fortune Berhad due to its failure to pay the last two
instalments (July & August). The machinery was then taken
back by the owner on 1 October 2013 and incurred the following
cost: Storage RM200, reselling RM500, and repossession cost of
RM350. The price of the machinery at the repossession date was
RM30,000.

BKAF3063 A141 32
Journal entries?
Repossess good’s value + total paid
= [30,000 – (200 + 500 + 350)] + (4,375 x 6)
= RM55,200
Total net payable = (4,375 x 12) - 192
= 52,308
3(3+1) / 2 x 2,500
12(12+1) / 2
Total claimable = 55,200 – 52,308
= 2,892
Amount receivable from owner

BKAF3063 A141 33
Hirer: Default and Repossession
Journal entries on the date of repossession:
1 Oct 2013 Dr. Interest expense 481
Cr. Deferred interest 481
[(6+5+4)/78 x 2,500]
Dr. Depreciation expense 5,250
Cr. Accumulated depreciation 5,250
(70,000 x 10% x 9/12)
Dr. Cash 2,892
Account payable 26,250
Accumulated depreciation 5,250
Loss on repossession 35,800
Cr. Deferred interest expense 192
Machinery 70,000

BKAF3063 A141 34
Accounting for
Hire-Purchase in
the book of
Owner (Seller)

BKAF3063 A141 35
HP in the Book of Owner
 Use sales method:
 Account receivables
 Revenue: - Gross profit (Cash price – COGS)
- Interest revenue (Hp price – Cash price)
 Inventory method:
 No receivables to be recorded – only when no
payment received for expired instalment.

BKAF3063 A141 36
HP in the Book of Owner
 Interest revenue: to defer and contra with AR.
 Gross profit:
 Immediate recognition
 based on collection
 Journal entries on the agreement date:
Dr. Accounts receivable xxx
Cr. Sales revenue xxx
Deferred interest revenue xxx
HP price
Cash price
HP price – Cash price

BKAF3063 A141 37
Owner:Recognition of Gross Profit
 Recognition based on collection:
Gross Profit Realized
= Gross profit x (collection – interest recognized)
Cash price

BKAF3063 A141 38
☞ Illustration 5:
On 1 May 2013, Hijau Berhad sold a risographic machine to
Merah Berhad on hire purchase. The cost and cash price of
the machine is RM7,000 and RM9,500 respectively. The
interest rate used is 10% per year. The agreement requires a
cash deposit of RM1,000 and 11 monthly instalments of
RM780 starting from 31 May 2013 and final instalment of
RM770.
Hijau Berhad closes its account on 31 December each year.

BKAF3063 A141 39
Journal entries?
HP price = (780 x 11) + 770 + 1,000
= RM10,350
Total interest = 10,350 – 9,500
= RM850
GP = 9,500 – 7,000
= RM2,500

BKAF3063 A141 40
Journal entries: Immediate recognition
1 May 2013
31 May –
30 Nov 2013
Dr. Accounts receivable 10,350
Cr. Sales revenue 9,500
Deferred interest revenue 850
Dr. COGS 7,000
Cr. Inventory 7,000
Dr. Cash 1,000
Cr. Accounts receivable 1,000
Dr. Cash 780
Cr. Accounts receivable 780

BKAF3063 A141 41
Journal entries:
31 Dec 2013
Dr. Deferred interest revenue 741
Cr. Interest revenue 741
(12+11+10+9+8+7+6+5)/78 x 850
Dr. Income summary 7,000
Cr. COGS 7,000
Dr. Cash 780
May - Dec
Dr. Sales revenue 9,500
Cr. Income summary 9,500
Dr. Interest revenue 741
Cr. Income summary 741

BKAF3063 A141 42
Hijau Berhad
Income Statement
For the year ended 31 Dec 2013 (partial)
Sales revenue 9,500
Less: COGS 7,000
Gross profit 2,500
Other income:
Interest revenue 741
Hijau Berhad
Balance Sheet
31 Dec 2013 (partial)
Current Assets:
Account receivable 3,110
Less: Deferred interest revenue 109
3,001
10,350 - 1,000 - (780x8)
850 - 741

BKAF3063 A141 43
Journal entries: Recognition based on collection
1 May 2013
31 May –
30 Nov 2013
Dr. Accounts receivable 10,350
Cr. Sales revenue 9,500
Deferred interest revenue 850
Dr. COGS 7,000
Cr. Inventory 7,000
Dr. Cash 1,000
Dr. Cash 780

BKAF3063 A141 44
31 Dec 2013
Dr. Deferred Gross Profit 7,000
Cr. COGS 7,000
Dr. Cash 780
Dr. Sales revenue 9,500
Cr. Deferred Gross Profit 9,500
Dr. Interest revenue 741

BKAF3063 A141 45
31 Dec 2013
Dr. Deferred Gross Profit 1, 710
Cr. Gross Profit realized 1,710
Dr. Gross Profit realized 1,710
Cr. Income summary 1,710
2,500 x 6,499
9,500
[1,000 + (780 x 8)] - 741

BKAF3063 A141 46
Hijau Berhad
Income Statement
For the year ended 31 Dec 2013 (partial)
Gross profit realized 1,710
Other income:
Interest revenue 741
Hijau Berhad
Balance Sheet
31 Dec 2013 (partial)
Current Assets:
Account receivable 3,110
Less: Deferred interest revenue 109
Deferred GP 790
2,211
2,500 – 1,710

BKAF3063 A141 47
Owner:Repossession
 Journalize the closing entries for:
 Accounts Receivable
 Deferred interest
 Deferred GP
 Transfer to Repossession account.
 Recognize gain or loss from repossession.

BKAF3063 A141 48
Owner:Repossession
☞ Illustration 6:
Refer to Illustration 5.
Assume Hijau Berhad has repossessed the asset on 1 April
2014 due to failure of Merah Berhad to settle the arrears
since January 2014. Merah Berhad also failed to return the
assets after 21 days receiving notice of repossession. The best
value of the asset at the date of the repossession is RM7,800.
Hijau Berhad charged Merah Berhad for repossession charge
of RM360, storage RM150 and repair of RM230. The selling
cost of the machine is expected to be RM600.

BKAF3063 A141 49
Owner:Repossession
Journal entries?
Repossess good’s value
= 7,800 – (360 + 150 + 230 + 600)
= RM6,460
Total net receivable = 10,350 - 11
= RM10,339
Total claimable (hirer) = (6,460 + 7,240) – 10,339
= RM3,361
Total payment = 1,000 + (780 x 8)
= RM7,240
1(1+1) / 2 x 850
12(12+1) / 2
Amount to be paid to hirer

BKAF3063 A141 50
Owner:Repossession
1 April 2014
(Record statutory rebate April 2014)
Dr. Repossession account 3,099
(Close accounts receivable)
(Recognize interest rev. for Jan, Feb & March 2014)
(4+3+2) / 78 x 850
Dr. Inventory 7,200
Cr. Repossession account 7,200
(Record the repossess asset)
7,800 - 600

BKAF3063 A141 51
Owner: Repossession
1 April 2014 Dr. Repossession account 740
Cr. Cash 740
(Record the repossession, storage & repair expenses)
Cr. Cash 3,361
(Record payment claimable by hirer)

BKAF3063 A141 52
Owner: Repossession
Journal entries: Based on collection
1 April 2014
(Record statutory rebate April 2014)
(Close accounts receivable)
(Recognize interest rev. for Jan, Feb & March 2014)
Dr. Inventory 7,200
Cr. Repossession account 7,200
(Record the repossess asset)
7,800 - 600

BKAF3063 A141 53
Owner: Repossession
1 April 2014 Dr. Repossession account 740
Cr. Cash 740
(Record the repossession, storage & repair expenses)
Cr. Cash 3,361
(Record payment claimable by hirer)
Dr. Deferred GP 790
Cr. Repossession account 790
(Close Deferred GP account)

BKAF3063 A141 54
Owner: Repossession
1 April 2014
Dr. Repossession account 790
(Record gain on repossession)

BKAF3063 A141 55
End of Topic 2
Reference:
Hire Purchase Act 1967

Topic 2 hire_purchase

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