Coursework

1. A machine is bought by K Thomas for $3,618 on hire purchase from Suppliers

Ltd on 1 January 2003.

2. It is paid by three instalments of $1,206 on 31 December of 2003, 2004 and 2005.

3. The cash price is $3,000.

4. Rate of interest is 10% per annum on the balance outstanding at the start of the

year.

5. Straight line depreciation of 20% per annum is to be provided.

1. Please do a three year hire purchase and shows the balance sheet figures that would

appear.

Note: The letters (A) to (F) refer to the description of entries following the account.
 Machinery
2003
Jan 01 Suppliers Ltd (A) 3,000

Suppliers Ltd
2003 2003
(A
Dec 31 Bank (B) 1,206 Jan 01 Machinery ) 3,000
Balance c/d (D) 2,094 Dec 31 HP interest (C) 300
3,300 3,300

2004 2004
(D
Dec 31 Bank (B) 1,206 Jan 01 Balance b/d ) 2,094
Balance (D) 1,097 Dec 31 HP interest (C) 209
2,303 2,303
2005 2005
(D
Dec 31 Bank (B) 1,206 Jan 01 Balance b/d ) 1,097
Dec 31 HP interest (C) 109
1,206 1,206

Hire Purchase Interest

2003 2003
Dec 31 Suppliers Ltd (C) 300 Dec 31 Profit and loss (E) 300
2004 2004
Dec 31 Suppliers Ltd (C) 209 Dec 31 Profit and loss (E) 209
2005 2005
Dec 31 Suppliers Ltd (C) 109 Dec 31 Profit and loss (E) 109

Provision for Depreciation: Machinery

2003
Profit and
Dec 31 loss (F) 600
2004
Profit and
Dec 31 loss (F) 600
2005
Profit and
Dec 31 loss (F) 600

Balance Sheets as at 31 December

2003 Machinery (at cost) 3,000
Less Depreciation 600
Owing on hire purchase
agreement 2,094
(2,694)
306
2004 Machinery (at cost) 3,000
Less Depreciation 1,200
Owing on hire purchase
agreement 1,097
(2,297)
703
2005 Machinery (at cost) 3,000
 Less Depreciation to date (1,800)
1,200

Description of entries:

(A) When the asset is acquired the cash price is debited to the asset account and the credit

is in the supplier's account.

(B) The instalments paid are credited to the bank account and debited to the supplier's

account.

(C) The interest is credited to the supplier's account for each period as it accrues, and it is

debited to the expense account, later to be transferred to the profit and loss account for the

period (E).

(D) The balance carried down each year is the amount of the cash price still owing.

(E) Depreciation provisions are calculated on the full cash price, as the depreciation of an

asset is in no way affected by whether or not it has been fully paid for.

In the case of a company, the balance sheet entries consist of balance (A), the cash price,

less balance (F), the amount of the cash price apportioned as depreciation. Balance (D), the
amount of the cash price still owing at each balance sheet date, is shown separately under

accounts payable.

2. List out the essential differences between a hire purchase and a normal purchase.

Hire purchase is a way of buying assets that avoids the need to pay in full either at the time

of purchase or very soon thereafter. The essential differences between a hire purchase and a

normal purchase are:

(a). The asset does not belong to the purchaser when it is received from the supplier.

Instead it belongs to the supplier providing the hire purchase.

(b). The purchaser will pay for the item by instalments over a period of time. This may be

for as long as two or three years, or even longer.

(c). The cost to the buyer will be higher than it would have been had the item been paid for

at the time of purchase. The extra money paid is interest.

(d). The asset does not legally belong to the purchaser until two things happen:

i.) The final instalment is paid

ii.) The purchaser agrees to a legal option to buy the asset.

If the purchasers want to, they could stop paying the instalments. They would then have to

give the asset back to the seller. They would not be able to get a refund of instalments

already paid.