HIRE PURCHASE INTEREST ALLOCATION ILLUSTRATION ON 1 JANUARI 2011, INDAH ENERPRISE bought a furniture on hire purchase from Mega

a Furniture. The particulars are below: CASH PRICE = RM 50,000 DEPOSIT = RM 25,500 NUMBER OF INSTALLMENTS = 6 QUATERLY INSTALLMENTS AMOUNT DUE TO EACH INSTALLMENTS = RM 6000 FOR THE FIRST FIVE INSTALLMENTS RM 4000 FOR THE LAST INSTALLMENT INTEREST CHARGED = 7 % PER ANNUM ON THE BALANCE OUTSTANDING AT THE BEGINING OF EACH QUARTER. STRAIGHT LINE METHOD FORMULA = INTEREST CHARGED PER INSTALLMENT : Total hire purchase interest No. of installment REDUCING BALANCE METHOD SUM of THE DIGITS METHOD Calculating interest charged by allocating consecutive digits to the installments n(n+1) , where n=no. of installment 2

INTEREST CHARGED : Interest rate (%) x Outstanding capital balance at the beginning of each period

CALCULATIONS : Total amount of installment ([RM6,000 X 5]+[RM4,000 X 1]) 34,000 + Deposit 25,500 Hire purchase price 59,500 (-) cash price (50,000) Total hire purchase interest 9,500 Interest charged 9,500 = RM1,583 6
OUTSTANDI NG AT THE BEGINING RM 24, 500 (50, 00025,500) 18, 929 INSTA LLME NTS RM 6,000 7% INTEREST RM (7 % v 24, 500 v 3/12) =429 (7 % v 18, 929v 3/12) =331 (7 % v 13, 260 v 3/12) =232 ( 7 % v 7, 492 v 3/12) =131 CAPITAL REPAYMENT RM 5,571 CLOSING BALANCE RM 18,929

31. 3. 201 1 30. 6.2 011 30. 9.2 011 31. 12. 201 1

6,000

5, 669

13, 260

n=6 [n(n+1)]/2 [ 6 (6 + 1) ] /2 = 21 Interest = lease price ([RM6,000 X 5]+[RM4,000 X 1]) 34,000 Cash price (30,000) TOTAL interest 4,000 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 4,000 x 6/21 4,000 x 5/21 4,000 x 4/21 4,000 x 3/21 4,000 x 2/21 4,000 x 1/21 1,143 952 762 571 382 190 4,000

13,260

6,000

5, 768

7, 492

7, 492

6000

5, 869

1,613

DIFFERENCES BETWEEN HIRE PURCHASE & CREDIT SALE HIRE PURCHASE Remains with the seller until paid by buyer Legal owner = seller Possible to repossess the asset CREDIT SALE Passes to buyer immediately Legal owner = buyer Seller can only sue for unpaid installment

LEGAL TITLE OF FIXED ASSET PAYMENT DEFAULT BY BUYER

WHAT IS HIRE PURCHASE? ACQUIRING ASSET ON CREDIT ACCOUNTING FOR HIRE PURCHASE TRANSACTIONS

HIRE PURCHASE INTEREST ALLOCATION STRAIGHT LINE METHOD REDUCING BALANCE METHOD SUM OF THE DIGITS METHOD

ENTRIES IN BUYERS BOOK / RECORDS p When a buyer acquires asset under a hire purchase contract, the asset will be recorded as asset of the buyer p The buyer has the right to use the asset once payment for deposit is made p Ownership of the asset Legal point of view Seller Commercial point of view Buyer p How to record? 1. Non-current asset a/c Dr Non-current asset a/c (at cash price) Cr Hire purchase creditor a/c (at cash price) 2. Hire purchase creditor a/c 3. Hire purchase interest expense a/c