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

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