15 HIRE PURCHASE SYSTEM |e mmm INTRODUCTION Selling goods for cash or credit is the most common form of trading activity, whereby the possession and title of ownership of goods immediately pass from the seller to the buyer. In case of cash sales, the trade activity comes to end immediately as and when the buyer pays cash and seller deliver the goods whereas in case of credit sales, the buyer pays or settles the-account in future date but ownership of the goods passed immediately. In both cases immediate or subsequent lump sum payment of cash is necessary which sometimes is a burden to the buyer. To eradicate this kind of burden in purchase of goods by making lump sum amount “[Link]” method of business has been designed. Under this method of payment goods purchased is spread over an agreed period of irtstalments. . This method is popular among the people in buying consumer durables like Television, Car, Refrigerators, Motor cycle, Residential apartments, ete, This method of sales is divided into two types, viz., (1) Hire Purchase and (2) Instalment Purchase. HIRE PURCHASE Under this method first the buyer hires the goods and at a later stage (after payment of last instalment amount) the ownership transfers to the buyer. It is a contract of agreement between two parties called>hire seller (owner of the goods) and the hire purchaser (buyer or customer) who accepts the offer to hire the goods from hire seller.¥ 15.2 Financial Accounting Contract Special Features of this Hire Purch 1. Immediate delivery of goods. 2. Payment of fixed number of Instalments Deferment of transfer of property (title or ownershi the payment of the last instalment. at definite intervals. p in the goods) until one) as a hire i.e., payment + the use of goods, but with the + instalment is retrospectively 4. Discharge of every instalment (except of every instalment as rental charges for payment of the last instalment, every prio treated as a payment for pri yy the hire sl fund of instalment so 5. Repossession of goods b ler for non-payment of any Ee who any 7 far paid by the hire instalment, without any re purchaser. ; 6. Liability for outstanding or unpaid instalments even after the hire purchaser is deprived of the possession. 7. Return of goods by the hire purchaser without any lial (undue) instalments, and 8. Transfer of property on the paym hire purchases terminates into an al bility for future rent of the last instalment whereby the ibsolute purchase. Some important points to be noted: . 1, When the hire purchaser has an option to to sell. . 2. When two or more goods sold on hire purchase, at the time of repossession the hire seller may permits the buyer to retain few items or allows him some credit on repossessed goods so as to mitigate hirer’s hardship. In the year 1972 to protect both parties interest, the Central Government enacted Hire Purchase Act on 8* June, 1972 with effect from 1* September, 1973. Important Definitions of the Act 1. Hire: It means the sum payable petiodicall i i Eee pe ly by the hirer under a hire 2. neo means the person who obtains or has obiained possession of goods from an owner under a hire purchase agreement. buy, the hire seller is bound 3. Hire purchase agreement: Under which goods are let on hire and the hirer i ir bee hes sn option to purcha them in accordance with the terms of the eae Sones mn on is delivered by the owner thereof person such person pays the C i periodical instalments, and (b rts goods to pase to such , and (b) the property in the s is Person on the payment of the last of suc! in tal an eee ! istalments and (c) such person right to terminate th © agreement at any ti poet greement at any time before the property5. 8. Hire Purchase System 15.3 Hire Purchase Price: The total sum payable by the hirer under hire purchase agreement in order to complete the purchase of the goods, or the acquisition of property in to which the agreement relates. Down Payment or Deposit or Initial Payment: Any amount payable by hirer under the hire purchase agreement by way of deposit or other ial payment at the time of entering into the contract. Net Hire Purchase Price: Difference between hire purchase price and down or initial payment or deposit Cash Price: The cash denotes the prices of the goods i.e., the price at which the goods may be purchased by the hirer for cash. Hire Purchase Charges or Interest: It is the difference between hire purchase price and net hire purchase price. In hire Purchase method both the parties are involved voluntarily, to buy and sell the goods; the hire purchase price is always higher than ordinary price of the goods. Although the aim of hire purchase system is sale of goods, the sale in normal sense and sale under hire purchase system are not the same. Differences between Sale and Hire Purchase ‘The differences between sale and hire purchase are as follows: [Link] Sale ° Hire Purchase ‘A ‘sale’ is governed by the Sale | Hire purchase is governed by the . of Goods Act, 1930. Hire Purchase Act, 1972. In case of sale, the ownership of | In case of hire purchase, the goods is transferred to the __| the ownership of goods is buyer immediately. transferred to buyer on payment of all instalments. In case of sale, the buyer makes | In case of hire purchase, the payment in lump sum either payment is made in instalments. immediately or some specified future date. \ : The buyer pays only for the The hire purchaser pays for the price of goods and also some price of goods. : amount of interest: ‘On non-payment of the ‘On non-payment of any consideration the seller cannot instalment, the seller can take back the goods, but can re-possess the goods. only take legal action on buyer.15.4 Financial Accounting Sal Hire Purchase ale : 0 Either the buyer or the seller 6 | Once a sale has taken place, \ , neither the seller, nor the buyer | can terminate the contract at any can terminate the contract point of time, until the payments (unless it is for genuine reason’ _| of last instalment. like damage of goods etc.) 7 | When the buyer becomes When the hire purchaser insolvent, the seller has to becomes insolvent, the seller can undertake the risk of loss. reposes the goods, and hence need not undertake the risk of loss. : 8 | Sales tax is charged as and when | In this case, the sales tax is the transaction comes to end. charged only at the time of . transfer of ownership (i.e. on payment of last instalment). INSTALMENT METHOD Under Instalment purchase system, the'ownership of the goods passes to the Purchaser immediately on signing the contract. In simple words, purchase of goods is outright but payment for it is made by different instalments. The Payment of instalment and rate of interest, are fixed at the time of executing the contract. Since the goods is transferred to the buyer along with title of ownership at the time of executing the contract itself, the seller has no right to repossess the goods even if the buyer makes any default in the payment of instalment. But the seller has a right to sue for the unpaid instalments. This method is also called as differed instalment system. Features of Instalment Payment System _ The features of instalment payment are as follows: : 1. Under this system, there will be an outright sale of goods/assets. 2. The possession as well as the ownership is passed to the buyer right at the time of signing the contract, 3. The buyer can make the payment in instalments. 4. In case of default in payment, the seller cannot repossess the goods, but he can sue the buyer for the recovery of unpaid price. 5. The buyer cannot exercise the option of returning the goods and terminate the contract; unless the same becomes void or voidable under the contract act.Differences between Hire Purch, instalment Purchase System” Hire Purchase System 15.5 System and sl. Basis of ae Hire-Purchase Instalment ___ System Purchase 1 | Nature of Itis a contract of Thi contract hiring. Is a contract of sale. 2 /Ownership Xs transecred by It is transferred aes uyer only by seller to buyer, afer payment ofall | immediately on signing — iments. the contract. 3 er of oo case, the buyer In this case, the buyer s like a baile, is not in the position of : a baile. 4 | Risk of loss Such risk is on the Such risk is on the or damage to seller. buyer. goods 5 [Repossession | On default of payment _| On default and payment and goods by _| of any instalment by the | of any instalment by seller buyer, the seller can "| the buyer, seller cannot repossess the goods. _| repossess the goods, : but can file a suit in the court of law against the buyer for the recovery ‘ of unpaid price. 6 |Return of goods |The buyer can exercise|The buyer cannot . the option of return of|exercisé the option of| goods. return of goods. 7 | Right of disposal | The buyer cannot ‘The buyer has the right tothe buyer _| dispose the goods, until | to dispose the goods, the payment of last even if all instalments instalment. If disposed, | are not yet paid. the third party buyer does not get a better tile. ACCOUNTING FOR HIRE PURCHASE In hire purchase the method vendor depends on the value of goods viz., a. Accounting method for high value of goods sold b. Accounting method for small value goods sold It may be noted that there is no such difference in accounting method in the books of hire Purchas of accounting transactions in the books of hire154 Financial Accounting Accounting method for High value goods: Under this method goods having high value are sold on hire purchase like Machinery, Motor car, Van, Bus, Trucks etc., In this metliod hire purchase transactions are recorded in two different methods, they are: : (i) Credit purchase with Interest method and (ii) Asset accrual method Credit Purchase with Interest method: In this method the intention of the buyer entering into the agreement is to acquire the asset immediately and therefore the asset is recorded at its total cash price. 5 LF. | Debit] Credit Date Particulars No. | Rs. Rs. 1. On the date of hire purchase agreement Asset A/c Dr. To Hire vendor Ale (For the amount of total Cash price) 2. For down payment made if any Hire vendor A/c Dr. To Cash or Bank A/c 3. For interest due Interest A/c : Dr. To Hire vendor 4. For payment of instalment Hire vendor A/c Dr. To Cash or Bank A/c 5. For depreciation at the end of the year Depreciation A/c Dr. To Asset A/c XXX" XXX XXX 6. For transferring the nominal accounts (Interest and Depreciation) to P&L A/c P&L Alc To Interest A/c . a To Depreciation A/c = Xxx Asset acerual method: In this method, the hire purchaser acquires the * gradually on the basis of payment of cash price i.e., after making last instalment the buyer become owner of the asset.Hire Purchase System 15.7 To Depreciation’A/c Date Particulars LF. | Debit | Credit | __ |1. On the date of hire purchase Nos.) agreement - for the amount of down payment Asset A/c Dr. XXX To-Cash or Bank A/c xxx 2. For instalment due Asset Alc Dr. xxx Interest A/c ° Dr. XXX To Hire Vendor A/c xxx 3. For payment of instalment 7 down payment Hire vendor A/c Dr. x To Cash or Bank A/c ax 4. For depreciation at the end of the year Depreciation A/c Dr. xx «To Asset A/c wx 5. For transferring the Nominal accounts (uterest and Depreciation) to P&L A/c P&L Ale Dr. x To Interest A/c xxx xxx Note 1: Journal entries 2 & 3 are repeated for every instalment instalment is paid. Note 2: At the end of the accounting year, entry for depreciation and transferring Interest and Depreciation to the P & L a/c are repeated. till last To Hire purchaser A/c In the Books of Hire Vendor LF. | Debit | Credit Date Particulars relevent 1. On the date of hire purchase agreement Hire Purchaser A/c Dr. xXx To Hire sales A/c xXx 2. For down payment made if any Bank or Cash A/c Dr. Xxx XXXny 15.8 Vinaneial Accounting J. For interest due Mire purchaser Ale De. AXX ‘Vo Interest Ale XXX 4. For instalment amount receive Cash Ale XXX ‘To Mire purchaser Ale Dr, XXX §. For transferring the nominal accounts Le. Interest to P&L Ale Interest A/e . Dr. ax _ToPSL Ale s for Hire vendor books, Calculation of Interest & Cash Price ‘The Hire Purchase Price is always greater than the cash price of the goods, Hire purchase price includes interest payable for the sacrifice made by the seller to sell the goods and collect the price for the goods over multiple instalments, Interest is calculated on the amount of cash price outstanding (total Cash price = Advance) and it is the compensation for the risk that the seller thereby undertakes, When the buyer ment, the goods may have’ to be taken back by the buyer in the condition they are at at time. Hence, the excess of hire purchase price over the total cash price taken as interest, The interest amount is included in each and every instalment and which ain to the seller. So it is necessary to calculate interest included in each hire purchase instalment transaction. Interest can be calculated under any one? of the following situations: For calculation of interest, cash price, instalment amounts and, rate of interest are required; if any of the information is not given, then the method used to calculate the value of interest will differ, By considering the information avail t calculation method is grouped into six methods, which are: iy Name of Method to be used to get interest amount 1 | When Cash Price, Interest rate Interest on Outstanding C: and Instalments are given. price method 2 | When Cash Price and Instalments are given but rate of interest is not Information available Hire Purchase Price outstanding Ratio methodInformation available 99 Hire Purchase System get Name of Method to be used interest amount When rate of interest and Instalments are given but cash [Price is not giyen. When Cash Price and Interest rates are given but Hire Purchase instalment is not given. Inverse or Back Calculation method Cash Price per instalment + Interest on Outstanding Cash [price = Hire Purchase Instalment ‘When hire purchase instalment is given but cash price and rate of interest are not given Simple equation method Cash Price computation by using Annuity Table value. When Annuity Table value is given Note: (Cash price = Installment X Annuity factor) + Down payment Hire Purchase Price (HPP) is total amount payable, which includes (a) Cash Price (CP) and (b) Interest (I) so, ¢ HPP=CP+I [OR] «© CP =HPP-I [OR] + 1=HPP-CP How interest Is calculated at various levels? In Hire purchase system each instalment includes two different amounts viz., Interest on outstanding balance and part payment of cash price. At the time of delivering goods, buyer has to pay, or advance payment or initial total cash price and only the payment. balance is considered for interest calculation. part of the cash price as down payment This amount must be reduced from The advance payment does not include any amount of interest. I. When Cash Price, In this method all the relevant information nece: will be given. Interest amount is calc Interest Rate and Instalments are given ry for calculating Interest the outstanding balance of jated on cash price, When reducing the interest from instalment, the balance represent Cash price, it will be reduced from the outstanding sh price to calcu interest for the next period. But the Interest of the final year should be taken as the difference between the outstandit at the end of the period hi pr and the amount of last instalment. The method of calculation of interest is clearly stated in IMustration 1.15.10 Financial Accounting Il. When Cash Price and Amount of Instalments are give! Rate of Interest is not given = / Under this method the rate of interest only not specified but it is Possible to get total interest payable on Hire purchase by reducing the cash price from the hire purchase price, i.c. HPP - CP = Total Interest.-Interest included in each instalment can be calculated on the basis of hire purchase price outstanding ratio at the beginning of the year. The amount of interest included in each instalment is clearly calculated with the help of Illustration 2. III. When Rate of Interest and Instalments are given but . Cash Price is not given In this method the cash prices is calculated with the help of inverse calculation taking the last instalment first and get the value of interest included in n but it. ; Rate of Interest @ Lae HPI amount x 769 + Rate of Interest Last HPI - Interest included = Cash Price of Last Instalment = Interest included in last Gi, Similarly for the HPI prior to the last HPI: CP of the Last HPI + HPI prior to last HPI x Rate of Interest 100 + Rate of Interest HPI prior to the Last HPI - Interest included =. CP of Prior Instalment (iii) The same procedure is to followed for next and subsequent Hire purchase instalment. . = Interest of that instalment (iv) Down payment does not include any amount of interest, so the entire amount should be taken as part of cash price. The method of calculating amount of interest included in each instalment and total cash price are clearly explained with the help of Illustration 3. IV. When Cash Price and Interest Rates are given but Hire Purchase Instalment is not given Under this method Hire Purchase Instalment (HPI) is calculated by adding the interest calculated on the outstanding balance of cash price with the every part payment of cash price i.e Cash Price + Interest = HPI amount, __ Total Cash Price is reduced by the instalment amount of Cash price paid will be the outstanding cash price on which interest is to be calculated for the next instalment. The same method is to be followed till the last instalment. The method of calculating Interest and Hire purchase instalment are explained in Illustration 4.Hire Purchase System 15.11 y. When Hire Purchase Instalment is gi i Rate of Interest are not given en Mt Cash Price and When the problem is salient about the amount of Cash Price and Rate of Interest, We have to calculate the amount of interest and cash price included in each installment given by applying simple arithmetic equation. a ee when the buyer agrees to pay in four installments the equation will be: Cash Price =X Interest = T IV HPI =x +i MI HPI = x + 2i 1 HPI = x + 3i I HPL = x + 4i By solving any two of the above equation it is possible to get the value of Interest and balance can be treated as cash price. The method of calculating cash price and interest is explained in Illustration 5. VI. Calculation of Cash Price by Annuity Method Under this method the cash’ price of the goods sold on Hire Purchase is calculated by adding the down payment with the value arrived by multiplying Hire purchase instalment and annuity rate given i.e. (Cash price = Installment x Annuity factor) + Down payment. The method of calculating total cash price is explained in Illustration 6. TERMINATION OF HIRE PURCHASE AGREEMENT BEFORE THE AGREED PERIOD OF INSTALMENTS Usually it happens in the hire purchase business, whenever the buyer wants to make full payment before the agreement becomes due. In such circumstances some amount of rebate for the foreclosure period can be claimed by the hirer according to the provisions of the Hire Purchase Act, 1972. But to claim this rebate the hirer has to inform the intention of termination of agreement by giving 14 days’ notice. The amount of Rebate as per the Act is to be calculated as follows: 2 Hire Purchases Charges * No. of Instalments due pebate = 5 Total No. of Instalments Default and Repossession ils to pay any instalment when due, the the entire goods without any ed. In practice, however, the Where a hire purchase customer fai hire vendor becomes entitled to repossess | Teimbursement of the instalment monies receiv15.12 Financial Accounting hire vendor exercises this right judiciously since indiscriminate repossessions adversely affect the business. The hire vendor can repair or recondition the repossessed goods and sell them to needed customers. The repossession may of two types they are (1) Complete Repossession and (2) Partial Repossession, Complete Repossession: When the hire vendor takes back the entire assets from the hire purchaser, then it is referred as Complete Repossession. Partial Repossession: When the hire vendor takes back only some part of the assets and leaves the remaining with the hire purchaser, then it is termed as partial repossession. - Accounting treatment at the time of complete repossession In the books of Hire Vendor (a) All the entries up to the date of default is passed except the entry for payment of instalment. The hire purchaser account is closed by transferring the balance to repossessed goods account. (b) The repossessed goods account is debited by amount spent for reconditioning the goods by crediting Bank or Cash Account. Repossessed goods A/c Dr. To Bank Ale xxx For sale of repossessed stock: Bank A/c Dr. xxx fs To Repossessed goods A/e XXX For loss on sale of repossessed goods Profit & Loss A/c Dr. xxx To Repossessed goods A/c Xxx Note: [Link] of profit, a reverse entry will be passed, In the books of Purchaser (a) Entry for interest and Depreciation up to the date of default must be Passed. @ (b) The balance of amount in the Hire vendor account transferred to asset Alc: Hire Vendor A/e Dr. xxx To Assets A/c XXX (©): Asset account is closed by transferring the balance if any to the Profit and Loss account, considering the amount as loss due to repossession of asset. .Hire Purchase System 15.13 Accounting treatment at the time of Partial repossession In eee al repossession. the hire vendor takes back the possession of a ahd ie may happen based on negotiation with the hirer. am In this method eee Tay agree to make some payment in the a i three steps follow f arti repossession Sameer ae eps lowed to account for the partial Stepl: Calculate book value of repossessed goods based on the rate of depreciation followed by the hire purchaser. Particulars Rs. | Cost of the assets repossessed — Cash Price XXX, Less: Depreciation up to date of repossession XXX Book value of repossessed goods XXX Step 2: Calculate agreed value of repossessed goods base on the rate of depreciation according to the hire vendor. Step 3: Loss on default = Book Value - Agreed Value Books of Hire Vendor All entries including interest up to the date of default are passed. Then the following entries may be passed: ; 1, On Repossession of Goods at agreed value: Repossessed goods Ae Dr. XXX To Hire Purchaser's A/c XXX Note: After passing this entry hire purchaser's account is balanced and carried down. 2. For amount spent on reconditioning of Repossessed goods Repossessed goods A/e Dr. XXX To Cash A/c/Bank Ale - XXX. 3. For sale of Repossessed goods Cash A/c/Bank A/c Dr..xxx os To Repossessed goods A/é XXX 4, For loss on sale of Repossessed goods ‘ Profit & Loss A/c Dr. xxx i To Repossessed goods A/c XXX Note: In case of profit, a reverse entry will be passed.System 15.21 ILLUSTRATIONS Hire Purchase System Methods of Computation of Interest When cash price, interest rate and instalments are given Vitustration 2. On 01.01.2013 Raman purchased an Air Conditioner from TVC Ltd., Cuddalore. Under Hire Purchase System, its cash price was Rs.62,700. Its other things are as follows: 1, Rs.18,000 is to be given at the time of signing the agreement. 2, The balance amount is to be paid in 3 equal annual instalments of Rs. 18,000 3, The rate of interest charged by the seller is 10%. Calculate the interest to be paid by the buyer to the seller every year. Solution: _ Calculation of Interest Date of | instalment ; Interest | Cash Value Payment | __Rs. ca ice 10% Rs. 01.01.13] 18,000 62,700 Nil] *18,000.00 31.12.14 18,000] 62,700 - 18,000 = 44,700} 4,470 13,530.00 31.12.15], 18,000} 44,700 - 13,530 = 31,170 3,117| 14,883.00 Last iristalment payable 18,000 but cash price 31.12.16 18,000 | due (31,170-14,883) = 1,713| 16,287.00 16,287, so difference is Interest i.e 18,000-16,287 Total 72,000 9,300] 62,700.00 Note: Interest = Outstanding Cash Price x Rate of Interest When cash price and instalments are given but rate of interest is nat given Jitustration 2 Mr. Karthik of Vandalur purchased a LED TV from a TV merchant under Hire Purchase Agreement, its cash price was Rs.1,62,000 on 01.01.2015 and is payable in 12 monthly instalments of Rs.20,000 starting from 31.01.2016. You are required to calculate the amount of interest and cash price included in each instalment. Solution: : Note 1: Calculation of total interest payable under HP agreement: Particulars Working Rs. HPP 70,000 x 12 | 2,40,000 cP As given 1,62,000 Total interest HPP - CP 78,000Statement of Apportionment of Total Interest of Rs.78,000 & Cash Price of Rs.1,62,000 | No, of HPP HPP Amount | : | Month | Month from | Outstanding | Outstanding | Payable Per | Working a | ie Inception Rs. Ratio Instalment | | : Hanuary 12 2,40,000 24 or 12 20,000] (78,000 /78) x 12} 12,000] 8,000, February n 2,20,000 2or ll 20,000] (78,000 /78) x 11} 11,000) 9,000 March “10 2,00,000 20 or 10, 20,000) (78,000 178) x 10) 10,000) 10,000 April 9 1,80,000 18 or 9 20,000} (78,000 /78) x 9} 9,000) 11,000, May 8 1,60,000 16 or8 20,000} (78,000/78) x 8) 8,000) 12,000) June 7 1,40,000 14or7 20,000} (78,000 /78) x 7} 7,000] “13,000 July 6 1,20,000 120r6}- 20,000} (78,000 /78) x 6| 6,000 14,000, August 5 1,00,000 10 ors 20,000] (78,000 /78) x 5} 5,000) 15,000) September 4 80,000 8or4 20,000] (78,000 /78) x 4} 4,000 16,000] October 3 60,000. 60r3 20,000| (78,000 /78) x 3) 3,000} 17,000] November 2 40,000 4or2| 20,000} (78,000 /78) x 2} 2,000} 18,000 December 1 20,000 2orl 20,000} (78,000 /78) x 1 19,000 15,60,000| 156 or 78] 2,40,000 78,000| _1,62,000/ iHire Purchase System 15.23 when rate of interest and instalments are given but cash price is not given " ynostration 3 Madhavan entered into an Hire Purchase agreement to buy a car with yr dealer by paying a down payment of Rs, 1,00,000 on tanvary 1 2014 and reed to pay the balance of Rs.5,10,000 in three equal annual instalment i's interest per annum. You are required to calculate the amount of eat inched in each instalment and cash price of the ca. Mr Solution: Note 1: Given hire purchase price is Rs.6,10,000 (Down payment + Balance payable), As per the agreement balance of Rs.5,10,000 is payable in three fal annual instalment of Rs. 1,70,000 each (5,10,000/3) combining payment ch price and interest. for Note 2: The hire purchase account of interest and cash price, of 100% and therefore the HPI = Table Showing Calculation of Interest & Cash Price instalment always includes amount payable an here the rate of interest is 5% on cash price 105%. So Interest = HPI/105 x 5. Calculation inverse | tmrerest| Cash vean| Due Date Insialment method (starting from ee) price last instalment) - 1 2 3 4 5 = (2-4) 1,61,905 1,70,000| (1,70,000/105) x 5 8,095, 1,70,000](1,61,905 +1,70,000)| /105 x 5 15,805] 1,54,195 (161,905 +1,54,195 +1,70,000)/105 x 5 No part of interest in the down payment IM [31.12.2016 | m 31.12.2015 1 |31.12.2014] 1,70,000 23,148] 1,46,852 6 |01.01.2014] 1,00,000 -|_1,00,000 47,048| 5,62,952 6,10,000) When cash price and interest rates are given but hire purchase instalment is not given Mustration 4 Ragu Transport Ltd., purcha 1 on hire purchase syste! ad the remainder in three equal annua 12% px. Calculate interest for each year. sed from TVS Motors 3 Vans costing Rs. 15,00,000 m. Payment was (0 be made Rs.3,00,000 down | installments together with interest at15.24 Financial Accounting Solution: Statement of Interest and HPI Calculation 7 Cash Price | Interest HPI Rs. Rs. Rs. ash price 15,00,000 : ee Down payment 3,00, 00, 12,00,000 - 4,00,000] 1,44,000 5,44,000 | 1* instalment | anding ca: 8,00,000 c 7 4,00,000 96,000 4,96,000 | . | Outstanding cash price at the end |of the third year 4,00,000 : - | 3° Instalment 4,00,000 48,000 4,48,000 [Total 2,88,000| __17,88,000 Down payment = Amount of Outstanding Cash Pri Cash price - 1 annual installment i.e Rs.12,00,000/3 . = is paid in three equal Rs.4,00,000. When hire purchase instalment is given but cash price and rate of interest are not given Mustration 5 . Mr. Kennan Purchased an Air conditioner from Radha & Co. on Hire purchase agreement-on 01.04.2013 by paying Rs.7,000 as down payment and the balance amount is payable by him as follows: At the end of the First financial year (31-03-2014) Rs.9,600 [At the end of the Second financial year (31-03-2015) Rs.8,700 [At the end of the Third financial year (31-03-2016) Rs.7,800 At the end of the Fourth financial year (31-03-2017) Rs.6,900 You are required to calculate the amount of Interest and Cash Price included in each instalment. Solution: Note I: The first instalment includes interest for the four years of outstanding, second includes for three years of outstanding, third year includes for two years of outstanding and fourth year for one year outstanding interest.chase System 15.25 Assume that cash price = x and ” Yearly interest = y Year TW " 6,900] 0 7,800 i 8,700 9,600 by subracting any two equation, it is possible to get the value of interest as 8.900. HPL 5 Year Interest Cash Price x ay =900 | Merest Tipy - Interest 900 y 900 6,000 Il 7,800 2y 1,800 6,000. rit 8,700}. 3y 2700 6,000 I 9,600 dy 3,600 6,000 Down payment |_7,000 Nil 7,000 40,000 - 9,000 31,000 Cash price computation by using annuity table value Illustration 6 Mr. Sakthi a sole trader purchased a motor van for his business under hire purchase system payable Rs.30,000 annually, for 10 years. The rate of interest is 5%. Given the present value of annuity of Re. for 10 years at 5% is Rs.7.7217. Calculate cash price. Solution: Note: Cash price = Instalment x Annuity factor given © Since on Re:1 annuity (instalment) for 10 years at 5%, Present worth i.e. Cash Price is Rs.7.7217. ® Hence on Rs.30,000 annuity i.e., instalment for 10 years at 5% interest, Present worth = Rs.7.7217 x Rs.30,000 = Rs.2,31,651. © Rebate on Termination of Hire Purchase Agreement Mustration 7 From the following information, calculate the e amount to be paid to the owner ifthe hire purchaser intends to complete the purchase of goods: Particulars Rs. Cash price 1,08,000 Down payment 9,000 Hire purchase price 1,17,000 Number of instalments 24 Instalments paid by the hire purchaser 18