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How To Apportion Hire Purchase Interest-Using Sum Of Digit Method Or Rule Of 78 (Part 3 of 3)

slang — Tue, 01 Dec 2009 09:44:47 +0000

Hire purchase interest are apportioned based on the reducing balance method (part 1) and on Straight line basis(part 2).

This final part 3 looks at another commonly used method to apportion hire purchase interest namely the Sum of digit method of Rule of 78

Example to illustrate the Sum Of Digit or Rule of 78 method to apportion hire purchase interest.

Under a hire purchase agreement, the company bought an air-conditioner with a cash purchase price of $3,500. A deposit of $500 is paid and 12 annual installments of $300 being agreed.

	$
Cash Price	3,500.00
Deposit	500.00
	3,000.00
Interest(12 x$300 -$3,000)	600.00
	3,600.00

The installments are numbered as follows:

Jan	Feb	Mar	Apr	May	Jun	Jul	Aug	Sept	Oct	Nov	Dec	Total
12	11	10	9	8	7	6	5	4	3	2	1	78

The total hire purchase interest of $600.00 is apportioned based on above weight:

Jan	12/78 x$600 =$92.30
Feb	11/78 x$600 =$84.62
Mar	10/78 x$600 =$76.92
Apr	9/78 x$600 =$69.23
May	8/78 x$600 =$61.54
Jun	7/78 x$600 =$53.85
July	6/78 x$600 =$46.15
Aug	5/78 x$600 =$38.46
Sept	4/78 x$600 =$30.77
Oct	3/78 x$600 =$23.08
Nov	2/78 x$600 =$15.39
Dec	1/78 x$600 =$ 7.69
	$ 600.00

How To Apportion Hire Purchase Interest-Straight Line Method (Part 2 of 3)

slang — Tue, 01 Dec 2009 07:55:00 +0000

Part 1 shows the reducing balance method .

This article looks at how the hire purchase interest is apportioned over the period of the agreement using the Straight Line method.

Example to illustrate the Straight line method to apportion hire purchase interest. Under a hire purchase agreement, the company bought an air-conditioner with a cash purchase price of $2,500. A deposit of $500 is paid and 24 annual installments of $100 being agreed.

	$
Cash Price	2,500.00
Deposit	500.00
	2,000.00
Interest(24 x$100 -$2,000)	400.00
	2,400.00
	Nil

Hire Purchase MONTHLY interest is apportioned as follows:-

	$	$	$
	Monthly Installment	Payment of Principal Amount	Payment of Interest Amount
$2,000/2,400 x$100		83.30
$400/2,400 x $100			16.70
	100.00	83.30	16.70

How To Apportion Hire Purchase Interest-Reducing Balance Method (Part 1 of 3)

slang — Tue, 01 Dec 2009 07:51:42 +0000

Note that the hire purchase interest needs to be apportioned over the period of the agreement. The commonly used methods are the Reducing Balance method, Straight Line method and Sum of Digits or Rule of 78 method

Below example illustrate the Reducing Balance method to apportion hire purchase interest:-

Using the Reducing Balance method to apportion hire purchase interest: Under a hire purchase agreement, the company bought an air-conditioner with a cash purchase price of $2,500. A deposit of $500 is paid and 4 annual installments of $631. Interest rate is 10%

	$
Cash Price	2,500.00
Deposit	500.00
	2,000.00
10% interest	200.00
	2,200.00
1st year installment	(631.00)
	1569.00
10 % interest	157.00
	1,726.00
2 nd year installment	(631.00)
	1,095.00
	110.00
	1,205.00
3 rd year installment	(631.00)
	574.00
	57.00
	631.00
4th year installment	(631.00)
	Nil

Difference Between Hire Purchase And Installment System

slang — Thu, 03 Jul 2008 14:14:27 +0000

For those unfamiliar between Hire Purchase and Installment System, tabulated below in summary some of the differences:

Hire Purchase	Installment System
Is an agreement of hiring	Is an agreement of outright purchase
Property in goods or the ownership remains with hire vendor until the last installment is paid by the purchaser.	The title to goods passes to the buyer immediately on agreement to purchase as is usual in the case of sale.
The hirer may return the goods without further payment as to future installments.	The goods are not returnable unless there is some default on the part of the buyer, the buyer is liable for the price agreed to or reasonable price if not agreed
Seller may take possession of the goods if the hirer is in default.	Seller can only sue for price if the buyer is in default.
The buyer can not hire-out, sell, pledge, assign, destroy, damage or transfer goods.	The buyer may dispose of and give title to any bona fide purchaser.

Accounting For Hire Purchase In The Purchaser’s Book

slang — Wed, 12 Dec 2007 12:15:13 +0000

This article deals the Accounting treatment of Hire Purchase Agreement of Purchaser:

In the Purchaser’s Books

Goods on hire purchase are treated as Assets upon receipt. The cash price is recorded as Cost of Assets re: Fixed Assets and

The interests on hire purchase are charge to the Profit & Loss account as revenue expenditure over the period of the Hire Purchase Agreement

Accounts Required in The Purchaser’s Books:

Asset Account
Hire Purchaser Company Vendor A/c
Hire Purchase Interest Suspense Account

Double entries:

(a) Debit :Asset Account

Credit: Hire Purchaser Company Vendor A/c

[ with the cash price of asset ]

(b) Debit: HP Interest Suspense A/c

Credit: Hire Purchaser Company Vendor A/c

[ with the total hire purchase interest ]

Credit: Bank A/c

[ payment of deposit and installment paid ]

(d) Debit : Profit & Loss a/c

Credit: HP Interest Suspense A/c

[ interest written off in the period ]

Various Accounts Items

1. Asset Account

records the cash price of the goods and separate asset accounts in respect of cost, depreciation and disposal are maintained.
Depreciation is computed on the full amount of the cash price
In Balance Sheet, asset will appear at cost less provision for depreciation.

2. Hire Purchase Company Vendor A/c

Shows amount payable payable under the hp agreement for both cash price plus hp interest.
Balance represent all unpaid installments
In the Balance sheet, the amount outstanding at the end of the account period shown as Current liability.

3. Hire Purchase Interest Suspense A/c

Shows interest included in the balance on the HP Company vendor a/c.
Interest apportioned to any accounting period is charged to the profit & loss a/c.
Balance represent interest needed to be apportioned to later accounting period
In the Balance sheet, the amount of hp interest suspense a/c must be deducted from the balance in the HP Company vendor a/c and shown as Current liability

Hire Purchase, Credit Sales And Rental Agreement

slang — Wed, 12 Dec 2007 12:13:29 +0000

This article deals with the features of Hire Purchase and the differentiation between Hire Purchase, Credit Sale and Rental Agreement:-

Features of Hire Purchase

When goods are purchased under a Hire Purchase Agreement:

Vendor of the goods leases the asset to the purchaser on the terms that the purchaser shall pay to the vendor hire charges equivalent to the cash purchase price plus interest on the outstanding balance.
The legal title to the assets does not pass to the purchaser until he has paid his final installment and exercise his option to purchase

On default of payment, the vendor can reclaim/repossess the asset subject to certain clauses of the Hire Purchase Acts?

Credit Sales Agreement:-

Here, the legal title of the goods passes to the purchaser immediately on delivery and the purchase price is payable by installments. In the eve

Rental Agreement:-

The legal title to the goods remains with the vendor and for as long as the customer possess the goods, he has to pay a rental charge.