PART – A ANSWERS
1. What is Hire purchase system?(NOV-2011, NOV-2012, NOV-2013,APRIL-2011, APRIL-2014)
Hire purchase is the system under which the property is acquired by payment made installments, during the period of which the title in the property remains with the hire vendor.
2. What is Installment system?( NOV-2012, APRIL-2010, APRIL-2014) Installment payment system (also called the deferred installments) is a system where the buyer is given the ownership as well as the possession of the goods at the time of signing the contract. The buyer has the facility to pay the price in installments.
3. Define Installment system.( APRIL-2010)
According to J.B. Batliboi, “a system under there is an agreement to purchase and pay by installments, the goods which become the property of the Purchaser immediately when he receives the delivery of the same.
4. What is meant by lump sum method?
The whole amount of the goods paid immediately at the time of purchase goods and the ownership also transfer immediately to the buyer.
5. What are the methods to maintain the accounts in the books of hire purchaser?
A. Outright property method B. Asset accrual method C. Interest suspense method
6. Who is Hire purchaser?(NOV-2010,APRIL-2014)
A hire purchaser is a person who possesses the goods under hire purchase
7. Who is Hire vendor?( NOV-2010, APRIL-2010,APRIL-2014)
A hire vendor is a person who sells the goods under hire purchase agreement.
8. What is meant by Hire purchase price?(NOV-2014,APRIL-2010,APRIL-2014)
It is the price at which the goods are sold under ‘hire purchase system’ it includes cash price of the goods and interest.
9. What is meant by Hire purchase agreement?
It is an agreement between hire purchaser and hire vendor according to section 2(c) of the hire purchase act, 1972 for purchasing of goods according to agreement.
10. What is Net hire purchase price?
It is the net amount after deducting the delivery charges, registration charges, insurance charges from hire purchase price.
11. What is meant by termination of hire purchase agreement?
The hirer can terminate the agreement at any time by giving the 14 days notice to the owner. However whatever the amount is already paid by the hirer is considered as a hire charges.
12. What is Cash Price?(APRIL-2010, APRIL-2013)
This is the retail price of the articles at which they can be purchased immediately for cash.
13. What is Hire or Installment?
This is the amount payable by the buyer periodically. The installments may be equal or different depending on agreement.
14. What is meant by rebate?
It is an amount which is claimed by the hire purchaser from the hire vendor in case if he decides to remit the balance of the purchase price (future installments) in lump sum without continuing the hire purchasing agreement.
15. What is meant by down payment?( NOV-2011, NOV-2010, APRIL-2010, APRIL-2011)
16. What is meant by interest in hire purchase?(APRIL-2010)
This is the additional amount apart from the cash price payable by the buyer as compensation for postponed payments.
17. What is meant by repossession of goods or repossessed stock?( APRIL-2014, APRIL-2011)
Repossession of goods means the hirer did not pay installment amount the goods will be taken up by the hire vendor.
18. What is meant by partial repossession?(NOV-2014, APRIL-2014)
The hirer did not pay installment amount the part of the goods only took by the hire vendor and left the remaining goods with the hirer equal to the value of amount paid by the hirer.
19. Write any two contents of Hire purchase agreement.
• The hire purchase price of the goods for which the agreement is made
• The number of installments in which the hire purchase price has to be paid 20. Give journal entry for down payment in the books of Hire – purchaser.
(APRIL-2013)
Hire vendor A/c Dr.
To Bank A/c
21. Give journal entry for down payment in the books of Hire – purchaser.
(NOV-2013, APRIL-2014)
Interest A/c Dr.
To Hire vendor A/c
PART – B ANSWERS
1. Write the features of Hire-Purchase System.(NOV-2010, NOV-2014,APRIL-2013)
• Hire-purchase is a credit purchase.
• The price under hire-purchase system is paid in installments.
• The goods are delivered in the possession of the purchaser at the time of commencement of the agreement.
• Hire vendor continues to be the owner of the goods till the payment of last installment.
• The hire-purchaser has a right to use the goods as a bailer.
• The hire-purchaser has a right to terminate the agreement at any time in the capacity of a hirer.
• The hire-purchaser becomes the owner of the goods after the payment of all installments as per the agreement.
• If there is a default in the payment of any installment, the hire vendor will take away the goods from the possession of the purchaser without refunding him any amount.
2. Write the features of Installment Payment System.(NOV-2013)
• Under this system, there will be an outright sale of goods/assets.
• The possession as well as the ownership is passed to the buyer right at the time of signing the contract.
• The buyer can make the payment in installments.
• In case of default in payment, the seller cannot repossess the goods, but he can sue the buyer for the recovery of unpaid price.
• 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.
3. Write the advantages and disadvantages of hire purchase.
Advantages:
• Costly items can easily be purchased by the consumers which he cannot otherwise purchase by making entire payment in lump sum.
• It increase turnover and enhances the profitability of the enterprise.
• It enables the consumer's family to enjoy the possession of the goods before payment is required.
• Hirer has a right to terminate the agreement at any time before the goods is transferred.
Disadvantages:
• Cost of items purchased by hire purchase system is more than the normal price as the customer has to pay interest on the balance amount.
• Hirer does not become the owner of goods hired, until payment of last installment is made.
• Hirer cannot sell or pledge goods hired until he becomes owner of such goods.
4. On 1.1.86, X purchased machinery on hire purchase system. The payment is to be made Rs.4000 down (on signing of the contract) and Rs.4000 annually for three
5. Mr.X purchased a machine on hire purchase system Rs.3000 being paid on delivery and the balance in five installments of Rs.6000 each , payable annually on 31st December. The cash price of the machine was Rs.30000. Calculate the amount of interest for each year.(NOV-2013, NOV-2014)
6. X purchased a typewriter on hire purchase system. As per terms, he is required to pay Rs.800 down, Rs.400 at the end of the first year, Rs.300 at the end of the second year and Rs.700 at the end of the third year. Interest is charged at 5% p.a.Calculate the total cash price of the typewriter and the amount of interest payable in the each installment.( NOV-2012, APRIL-2014)
7. X purchased a machine on hire purchase system. According to the terms of the agreement Rs.40000 was to be paid on signing of the contract. The balance was to be paid in four annual installments of Rs.25000 each plus interest. The cash price was Rs.140000. Interest is chargeable on outstanding balance at 20% per annum.
Calculate the interest for each year and the installment amount.(NOV-2014)
8. On 1.1.90 X bought some trucks under hire purchase system for Rs.51000 payable by three equal installments combining principal and interest, the later being a normal rate of 5% p.a. Calculate the cash price .( The present value of annuity of one rupee for the three years at 5% is Rs.2.72325)(NOV-2010)
9. From the following details of a businessman who sells goods of small value at cost plus 50%. Prepare hire purchase trading account. Rs.
1.1.90
Stock out with the customer at H.P price 9000 Stock at the shop at cost price 18000 Installments due but not received 5000 31.12.90
Goods worth Rs.500 repossessed (Inst. Not due Rs.2000)
Cash received from customers 60000
Purchase made during the year 60000
Stock out with the customer at H.P price 30000 Stock at the shop at cost (excluding goods repossessed) 20000 Installments due but not received 9000
10.Raman purchased a motor car from bharathan whose cash price is Rs.56000 on 1.1.93. Rs.15000 is paid on signing the contract and the balance is to be paid in three equal annual installments of Rs.15000 each. The rate of interest is 5% p.a. Calculate the amount of interest included in the each installments.( NOV-2012)
11.Mohan purchased a car on hire purchase system the cash price of the car was Rs.15980, payableRs.4000 being paid down and the three installments of Rs.6000 Rs.5000, Rs.2000 at the end of the first, second and third year respectively. Interest is charged at 5% p.a. Calculate the amount of interest for each year.(NOV-2011, APRIL-2014)
12.Mr.X purchased a cycle on hire purchase system for Rs.1000 to be paid as follows:
Rs.800 on signing of contract, Rs.400 at the end of the first year, Rs.300 at the end of the second year and Rs.700 at the end of the third year. Interest is charged at 5% p.a.
Calculate the total cash price of the cycle and the amount of interest payable in the each installment.
13. Calculate the cash price of the machine from the following information. (APRIL-2013)
Down payment Rs.10000
Four annual installments at the end of each year Rs.10000 Rate of interest 5% per annum
PART – C ANSWERS
1. Differences Between Hire Purchase System and Installment Purchase System.
(NOV-2010, NOV-2011, APRIL-2010, APRIL-2013, APRIL-2014)
Hire-Purchase System Installment Purchase It is a contract of hiring. It is a contract of sale.
It is transferred by seller to buyer only after payment of all installments.
It is transferred by seller to buyer, immediately on signing the contract.
In this case, the buyer is like a bailee. In this case, the buyer is not in the position of a bailee.
Such risk is on the seller. Such risk is on the buyer.
On default of payment of any installment by the buyer, the seller can repossess the goods.
On default of payment of any installment by the buyer, seller cannot repossess the goods, but can file a suit in the court of law against the buyer for the recovery of unpaid price.
The buyer can exercise the option of return of goods.
The buyer cannot exercise the option of return of goods.
The buyer cannot dispose the goods, until the payment of last installment. If
The buyer has the right to dispose the goods, even if all installments are not yet paid.
2. Mr.P purchased 4 cars for Rs.14000 each on 1.1.92 under the hire purchase system.
The hire purchase price for all the 4 cars was Rs.60000 to be paid as Rs.15000down payment and 3 equal installments of Rs.15000each at the end of each year. Interest is charged at 5% p.a. The buyer depreciates the car at 10% on straight line method.
From the above particulars give journal entries and relevant A/c’s in the books of Mr.P and in the hire vendor.(NOV-2011, NOV-2012, APRIL-2011)
3. Knight purchased a truck for Rs.160000 from S.Waugh on 1.1.93 payment to be made Rs.40000 down and Rs.46000 at the end of the first year, Rs.44000 at the end of the second year and Rs.42000 at the end of the third year. Interest was charged at 5%
p.a. Knight depreciates truck at 10% p.a on written down value method.
Knight after having paid down payment and first installment at the end of the first year, could not pay the second installment. The seller took repossession of truck after spending Rs.4000 on the repairs , sold it awa y Rs.91500.
Prepare ledger accounts.
4. On 1.1.90 National transport company purchased from Metro motors five trucks costing Rs.40000 each on the hire purchase system. It was agreed that Rs.50000should be paid immediately and the balance in three equal installments of Rs.60000 each at the end of the each year. The Metro motors charges interest at 10%p.a. The buyer depreciates trucks at 10%p.a. on the diminishing balance method.
The buyer paid the down and two installments and failed to last installment.
Consequently the Metro motors repossessed three trucks leaving two trucks with the buyer and adjusting the value of three trucks against the amount due. The trucks repossessed were valued on the basis of 30% on the written down value method. The trucks repossessed were sold by Metro motors for Rs.60000 after necessary repairs amounting to Rs.10000. Open the necessary ledger accounts in the books of both the parties.
5. From the following details, set out the hire purchase trading account in the books of a trader who sells a number of articles of comparatively small value daily on the hire purchase system, showing his profit on this department of the business for the year ended 31.12.88. For the purpose of charging his hire purchase customers, he adds 60% to the cost of the goods. Rs.
1.1.88 Stock in customers hands at the selling price 1620 31.12.88 Sale of goods on H.P. at selling price 6534 Cash received from H.P customer at selling price 2100 Cost in customer’s hand at selling price 4474 Good repossessed (Installments dueRs.1000) valued at 250
6. Krishna sells products on H.P terms, the price being cost plus 33 1/3 % . From the following particulars for the year ended 31.12.95, prepare the necessary accounts on stock and debtor system to reveal the profit earned. Rs.
1.1.95 Stock out on hire at H.P price 1600000
Stock in hand at shop 200000
Installments due (customers still paying) 120000 31.12.95 Stock out on hire at H.P price 1840000
Stock in hand at shop 280000
Installments due (customers still paying) 200000
Cash received during the year 3200000.