Download - Hire Pirchase A122 1
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BKAF3063 A122 1
Accounting forHire Purchase
Chapter
2(Part 2)
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BKAF3063 A122 2
Chapter Outline
Procedures and rules under Hire Purchase Act 1967. Definition
hire purchase rights
sellers right
Accounting by purchaser/hirer:
recognition of interest expense
repossession
Accounting by seller/owner: recognition of interest revenue and gross profit
repossession
Disclosure requirement.
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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
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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
installments.
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
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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.
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Hire-Purchase Act 1967
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 installments to be paid under the
agreement by the hirer.3) specify the amount of each of installments and the person
whom and the place at which the payments of these
installments are to be made.
4) specify the time for the payment of each of those installments.5) contain a description of the goods sufficient to identity them.
6) specify the address where the goods under the hire purchase
agreement are.
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Hire-Purchase Act 1967
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.
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Hire-Purchase Act 1967
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
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Hire-Purchase Vs Credit Sales
Hire-purchases Credit sales
Ownership of theasset
Not transferred Transferred
Return of goods Returnable Not returnable
Repossession of
goods Yes No
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Accounting for
Hire-Purchase in
the book ofHirer
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HP in the Book of Hirer
Substance over form.
Hire-purchase price = Cash price + interest
or= Deposit + installments amount
Depreciation: cost over useful life of the asset.
Method of recording:
1. Net Method
2. Gross Method
Cost of asset = cash price
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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 amortized.
Method of amortization:1) Actuarial / effective interest / residual balance
2) Sum-of-the-years digit
3) Straight line
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Hirer : Interest
Illustration 1:
On 1 July 2012, ABC Bhd purchased a machine under hire-
purchase agreement with Banker Berhad. The company paid
deposit of RM1,000 and further installments of RM902 per
month for 5 month starting from 31 July 2012. 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.
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Hirer : Interest
Solution toIllustration 1:HP price = cash deposit + installments
= 1,000 + (902 x 5)= RM5,510
Interest = HP priceCash price
= 5,5105,400
= RM110
Interest amortization?
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Hirer : Interest
1. Effective interest method:
Installment 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
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Hirer : Interest
Illustration 2:
On 1 July 2012, Senja Trading Co. purchased a delivery van
under hire-purchase agreement with Banker Berhad. The
company paid deposit of RM20,000 and further installments
of RM5,200 per month for 6 month starting from 31 July
2012. The cash price of the delivery van is RM50,000.
Interest rate charged is 8% per year.
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Hirer : Interest
Solution toIllustration 2:HP price = cash deposit + installments
= 20,000 + (5,200 x 6)= RM51,200
Interest = HP priceCash price
= 51,20050,000
= RM1,200
Interest amortization?
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Hirer : Interest
2. Sum-of-the-years digit:
Amortization of interest:
Number for specific installments x total interest
Total number of installments
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
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Hirer : Interest
2. Straight-line:
Amortization of interest = 1,200 / 6 = RM200 per month
Total interest .
Total number of installments
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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-year method
Dr. Account payable 5,200Cr. Cash 5,200
(To record payment of instalment)
1 July 2012
31 July 2012
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Hirer : Gross Method
Dr. Asset (cash price) 50,000
Deferred interest 1,200
Cr. Account payable 51,200(To record amount payable to sellerhp price)
Dr. Account payable 20,000
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-year method
Dr. Account payable 5,200Cr. Cash 5,200
(To record payment of instalment)
1 July 2012
31 July 2012
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HP in the Book of Hirer
Situations:
1. HP complete as per contract.
2. Hirer fail to pay installment
defaults & repossession
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Hirer:Default and Repossession
S16 - Owner has a right to repossess asset if: S16(1): hirer fails to pay 2 installments
consecutively or fail to pay last installment.
Notice should be given to hirer to notify about therepossession (Schedule 4). Owner has the right to
repossess asset after 21 days of notification.
S16(2): owner feel suspicious that asset willbe transferred to another place other than
place which stated in contract.
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Hirer:Default and Repossession
S16A- If asset is returned within 21 days ofnotification, 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; orc) let owner to repossess goods.
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Hirer:Default and Repossession
a) renew the contract:
Payment to be made:Installment in arrears
(+) interest in arrears
(+) storage/custody/repair cost
(+) repossession cost
(+) redelivery cost
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Hirer:Default and Repossession
b) settle contract before maturity date:
Payment to be made:
Hire-purchase price xx(-) (deposit + installment paid) xx
(-) statutory rebate xx
(+) storage/custody/repair cost xx
(+) repossession cost xx
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Hirer:Default and Repossession
Illustration 3:On 1 January 2012, Sipadan Co. purchased a drilling machinery under a hire-
purchase agreement with Siberi 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 installments of RM4,375 per month for 12 months
starting from 31 January 2004. Interest rate charged is 5% per year.
On 15 September 2012, Sipadan Co. received a notice to repossess by the
Siberi Co. due to its failure to pay the last two installments (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.
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Hirer:Default and Repossession
Solution toIllustration 3:Payment to be made:
Hire-purchase price 72,500
(-) deposit + installment 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
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Hirer:Default and Repossession
Solution toIllustration 3:Journal entries:
Dr. Account payable 26,250
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
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Hirer:Default and Repossession
c) let owner to repossess goods:
if: Repossess goods value+ total paid
Total net payable>hirer can claim the excess,
vice versa, hirer must pay
original unpaid balance
(hp price)
() statutory rebate1. reasonable best price, or
2. price to pay by a new hirer by cash
minus: - repossession cost
- storage cost
- sales cost/written-off goods
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Hirer:Default and Repossession
Illustration 4:
Using the same information in Illustration 3:
On 10 September 2012, Sipadan Co. received a notice to
repossess by the Siberi Co. due to its failure to pay the last two
installments (July & August). The machinery was then taken
back by the owner on 1 October 2012 and incurred the followingcost: Storage RM200, reselling RM500, and repossession cost of
RM350. The price of the machinery at the repossession date was
RM30,000.
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Hirer:Default and Repossession
Solution toIllustration 4:
Journal entries?
Repossess goods 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 = 55,20052,308
= 2,892
Amount receivable from owner
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Hirer: Default and Repossession
Journal entries on the date of repossession:
1 Oct 2012 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 26,250Accumulated depreciation 5,250
Loss on repossession 35,800
Cr. Deferred interest expense 192
Machinery 70,000
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Accounting for
Hire-Purchase in
the book of
Owner
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HP in the Book of Owner
Use sales method:
Account receivables Revenue: - Gross profit (Cash priceCOGS)
- Interest revenue (Hp priceCash price)
Inventory method:
No receivables to be recordedonly when nopayment received for expired installment.
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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 priceCash price
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Owner:Recognition of Gross Profit
Recognition based on collection:
Gross Profit Realized
= Gross profit x (collectioninterest recognized)
Cash price
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Owner:Recognition of Gross Profit
Illustration 5:On 1 May 2011, Hijau Co. sold a risographic machine to
Merah Co. on hire purchase. The cost and cash price of themachine 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 installment of RM780
starting from 31 May 2011 and final installment of RM770.
Hijau Co. closes its account on 31 December each year.
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Owner:Recognition of Gross Profit
Solution toIllustration 5:
Journal entries?
HP price = (780 x 11) + 770 + 1,000
= RM10,350
Total interest = 10,3509,500
= RM850
GP = 9,5007,000= RM2,500
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Owner:Recognition of Gross Profit
Journal entries: Immediate recognition
1 May 2011
31 May
30 Nov 2011
Dr. Accounts receivable 10,350
Cr. Sales revenue 9,500
Deferred interest revenue 850Dr. COGS 7,000
Cr. Inventory 7,000
Dr. Cash 1,000
Cr. Accounts receivable 1,000
Dr. Cash 780
Cr. Accounts receivable 780
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Owner:Recognition of Gross Profit
Journal entries:
31 Dec 2011
Dr. Deferred interest revenue 741Cr. Interest revenue 741
(12+11+10+9+8+7+6+5)/78 x 850
Dr. Income summary 7,000Cr. COGS 7,000
Dr. Cash 780
Cr. Accounts receivable 780
May - Dec
Dr. Sales revenue 9,500
Cr. Income summary 9,500
Dr. Interest revenue 741
Cr. Income summary 741
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Owner:Recognition of Gross Profit
Hijau CompanyIncome Statement
For the year ended 31 Dec 2011 (partial)
Sales revenue 9,500Less: COGS 7,000
Gross profit 2,500
Other income:Interest revenue 741
Hijau CompanyBalance Sheet
31 December 2011 (partial)
Current Assets:Account receivable 3,110Less: Deferred interest revenue 109
3,001
10,350 - 1,000 - (780x8)
850 - 741
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Owner:Recognition of Gross Profit
Journal entries: Recognition based on collection
1 May 2011
31 May
30 Nov 2011
Dr. Accounts receivable 10,350
Cr. Sales revenue 9,500
Deferred interest revenue 850Dr. COGS 7,000
Cr. Inventory 7,000
Dr. Cash 1,000
Cr. Accounts receivable 1,000
Dr. Cash 780
Cr. Accounts receivable 780
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Owner:Recognition of Gross Profit
31 Dec 2011
Dr. Deferred interest revenue 741
Cr. Interest revenue 741
Dr. Deferred Gross Profit 7,000
Cr. COGS 7,000
Dr. Cash 780
Cr. Accounts receivable 780
Dr. Sales revenue 9,500
Cr. Deferred Gross Profit 9,500
Dr. Interest revenue 741
Cr. Income summary 741
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Owner:Recognition of Gross Profit
31 Dec 2011
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
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Owner:Recognition of Gross Profit
Hijau CompanyIncome Statement
For the year ended 31 Dec 2011 (partial)
Gross profit realized 1,710
Other income:Interest revenue 741
Hijau CompanyBalance Sheet
31 December 2011 (partial)
Current Assets:Account receivable 3,110Less: Deferred interest revenue 109
Deferred GP 7902,211
2,5001,710
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Owner:Repossession
Journalize the closing entries for:Accounts ReceivableDeferred interestDeferred GP
Transfer to Repossession account.
Recognize gain or loss from repossession.
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Owner:Repossession
Illustration 6:Refer to Illustration 5.
Assume Hijau Co. has repossessed the asset on 1 April 2012
due to failure of Merah Co. to settle the arrears since January
2012. Merah Co. 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 Co. charged
Merah Co. for repossession charge of RM360, storage RM150
and repair of RM230. The selling cost of the machine is
expected to be RM600.
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Owner:Repossession
Solution toIllustration 6:
Journal entries?
Repossess goods value
= 7,800(360 + 150 + 230)
= RM7,060
Total net receivable = 10,350 - 11
= RM10,339
Total claimable (hirer) = (7,060 + 7,240)10,339
= RM3,961
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
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Owner:Repossession
Journal entries: Immediate recognition
1 April 2012
Dr. Deferred interest revenue 11
Cr. Accounts receivable 11
(Record statutory rebate April 2005)
Dr. Repossession account 3,099
Cr. Accounts receivable 3,099(Close accounts receivable)
Dr. Deferred interest revenue 98
Cr. Interest revenue 98
(Recognize interest rev. for Jan, Feb & March 2005)
(4+3+2) / 78 x 850
Dr. Inventory 7,200
Cr. Repossession account 7,200
(Record the repossess asset)
7,800 - 600
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Owner: Repossession
Journal entries: Immediate recognition
1 April 2012 Dr. Repossession account 740
Cr. Cash 740
(Record the repossession, storage & repair expenses)
Dr. Repossession account 3,961
Cr. Cash 3,961
(Record payment claimable by hirer)
Dr. Income summary 600
Cr. Repossession account 600
(Record loss on repossession)
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Owner: Repossession
Journal entries: Based on collection
1 April 2012
Dr. Deferred interest revenue 11
Cr. Accounts receivable 11
(Record statutory rebate April 2005)
Dr. Repossession account 3,099
Cr. Accounts receivable 3,099(Close accounts receivable)
Dr. Deferred interest revenue 98
Cr. Interest revenue 98
(Recognize interest rev. for Jan, Feb & March 2005)
Dr. Inventory 7,200
Cr. Repossession account 7,200
(Record the repossess asset)
7,800 - 600
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Owner: Repossession
Journal entries: Based on collection
1 April 2012 Dr. Repossession account 740
Cr. Cash 740
(Record the repossession, storage & repair expenses)
Dr. Repossession account 3,961
Cr. Cash 3,961
(Record payment claimable by hirer)
Dr. Deferred GP 790
Cr. Repossession account 790
(Close Deferred GP account)
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Owner: Repossession
Journal entries: Based on collection
1 April 2012Dr. Repossession account 190
Cr. Income summary 190
(Record gain on repossession)
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End of Chapter 2
Reference:
Hire Purchase Act 1967