B.COM 1ST SEMESTER, HIRE PURCHASE AND INSTALMENT PURCHASE SYSTEM
FINANCIAL ACCOUNTING
HIRE PURCHASE AND INSTALMENT PURCHASE SYSTEM
Q1. What do you understand by hire purchase System/Hire
purchase agreement?
Or what is the legal position of hire purchase
system?
Ans- According
to section 2 of the hire purchase ACT,1972, hire purchase system means an
agreement under which goods are let on hire and under which the hirer has an
option to purchase them in accordance with the terms of the agreement and
includes an agreement under which:-
i.
The property in the goods is to pass to such person on the payment of the
last of such installments, and
ii.
Such person has a right to terminate the agreement at any time before the
property so passes.
iii.
Possession of goods is delivered by the owner there of to a person on
condition that such person pays the agreed amount in periodical installment.
Q2. Discuss
the features of hire purchase system ?
Or discuss briefly the main provision of the hire
purchase Act,1972 which are relevant for accounting purposes.
Ans- The following are the main features of hire purchase system:
i.
The hire purchase has the right to terminate the agreement at any time
before the property so passes.
ii.
The goods should be delivered by the hire vendor on the condition that a
hire purchaser should pay the agreed amount in periodical installment.
iii.
The hire vendor transfers only possession of the goods to the hire
purchaser immediately after the contract for hire purchase is made
iv.
Each installment including down payment is treated as hire charges by the
seller.
v.
Each instilment consists party of a finance charge and party of a capital
payment.
vi.
The hire purchaser should be given power to exercise the option to
purchase the hired goods.
vii.
In case of default in respect of payment of even the last installment,
the hire vendor has the right to taken goods back without making any
compensation.
viii.
The property in the goods is to pass to the hire purchaser on the payment
of last installment and exercising the option conferred upon him under the
agreement.
ix.
The hire purchaser generally makes a down payment on signing the
agreement and the balance of the amount along with interest is paid in installments
at regular interval for a specified period.
Q3
. Give the merits of hire purchase system.
Or What are the advantages
of hire purchase system?
Ans-The
following are the advantages of hire purchase system:
i.
Right of Lien: The hire seller has a right of lien
on the goods sold until the full payment is made.
ii.
Possession of Goods: The hire purchaser acquires the
immediate possession of goods on entering into an agreement, irrespective of
the payment made.
iii.
Interest as an extra earning: The hire vendor can earn extra income
in the form of interest which he charges from the hire buyer.
iv.
Payments though earning: The hire buyer can use the goods
productively and can even earn revenue which can be used in payment of installments.
v.
Increase in sales volume: this system creates new horizon of
business and thus provides opportunity to the seller to increase their sales
volume and consequently to increase profit.
vi.
Option to return the goods: The hire buyer has an option to test the quality of
goods before full payment is made. So, he has the option to return the goods if
the goods are found to be quality deficient or if such goods fails to satisfy
the changing needs of the business.
Q4.Give
the demerits of hire purchase system.
Or
What are the disadvantages of hire purchase system ?
Ans- The following are the
disadvantages of hire purchase system:
i.
Costlier: The goods purchased under hire
purchase system are costlier as interest is charged on the unpaid balance installments.
ii.
Mortgage of future Income:
The buyer is forced to mortgage his future income which brings hardship
to him.
iii.
Requirement of Huge Finance: hire purchase trading is accrediting
business and thus it requires huge capital investment which is not affordable
to all traders.
iv.
No ownership of Goods: The buyer does not become the owner
of goods until the last installment is paid and as such he cannot sell or
mortgage the goods until he becomes the owner.
v.
Difficulty In selection of Hire
buyer: The hire
vendor always runs a difficulty in selection of hire buyer as the payments are
to be made with the passage of time and there is a huge risk of bad debt.
Q5.Define the following terms in
connection with the hire purchase system:
Ans- The
definition of the following term in connection with the hire purchase system
are as follows:
i.
HIRE VENDOR: The seller in a hire purchase
agreement is known as hire vendor.
ii.
HIRE PURCHASER: The buyer in a hire purchase
agreement is known as hire purchaser.
iii.
DOWN PAYMENT: The initial payment made at the time
of signing the hire purchase agreement is known as down payment.
iv.
CASH PRICE: The amount to be paid on outright
purchase in cash is known as cash price.
v.
HIRE PURCHASE PRICE: The amount to be paid if the goods
are purchased under the hire purchase system is known as hire purchase price.
It includes the cash price and interest of the future installment.
vi.
GOODS REPOSSESSED: It means goods taken back by the hire
vendor from the hire purchase in case he makes any default in the payment of
any installment.
Q7.Discuss the accounting treatment of repossessed goods on default made
by hire purchaser ?
Ans: Goods
repossessed means goods taken by the hire vendor from the hire purchaser in
case he makes any default in the payment of any installment.
There are two possibilities in
repossession of goods:
i.
Complete Repossession
ii.
Partial Repossession
i.
Complete Repossession: In the case of a complete
repossession, whole of the assets is taken back by the hire vendor. The hire
vendor closes the hire purchaser account in his books by transferring the
balance of the hire purchaser account to the goods Repossessed account. Likewise,
the hire purchaser closes the hire vendor account in his books by transferring
the balance of the hire purchase Assets Account to the hire vendor account.
ii.
Partial Repossession: In case of a
partial repossession, only a part of the asset is taken back by the hire vendor
and other part is left with the hire purchaser. As apportion of the asset is
still left with the hire purchaser, neither party closes the account of the
other in their respective books.
Q8. Explain how provision is made against free maintenance in case of
hire purchase system.
Or
Explain how reserve for service is made in case of hire purchase system.
Ans- When
goods are sold with the guarantee for free maintenance or service for a
stipulated period, a provision should be created for free maintenance and
servicing out of the sales as sales include a charge for free maintenance in
the books of the vendor. This amount may be credited to a separate account
called maintenance suspense account. Actual maintenance expenses are debited to
this account and the differences between the actual and estimated expenses
should be treated as profit or loss. If the guarantee is for one year, it will
involve two years, i.e., half of current year and half of next year. Similarly
if the guarantee is for two years, it will involve half of the current year,
the whole of the next year and half of the third year assuming that sales in
the first year are made in the middle of the year.
Q.9. write a note on Hire purchase
trading account.
Ans:- when numerous
articles of comparatively small value are sold daily on hire purchase basis, it
becomes impracticable to calculate interest in respect of each and every sale.
In such a case, hire purchase trading account to maintained to ascertain the
profit or loss on hire purchase business.
Q10. write a note on stock and debtor
system.
Or Discuss the accounting procedure for
the preparation of accounts under stock and debtor system.
Ans- The stock and debtor
system is applied for the ascertainment of profit and loss on good of small
value sold on hire purchase basis. Under this system, hire purchase stock
account, hire purchase debtors account,
Good sold on hire purchase account,
goods repossessed account and hire purchase adjustment account are prepared.
Q.11 what is installment purchase system
?
Or What do you understand by installment payment system / Installment sale
?
Ans- An installment
purchase system is a credit sale in which payments are made in installment over
a period of time. Under this system the buyer is given the possession and also
ownership of the goods right at the time of signing the agreement. If the buyer
defaults, the seller cannot repossess the goods but he can sue the buyer for the
amount due.
Q.12 Discuss the feature of installment
purchase system ?
Ans- The following are the
main features of installment purchase system:
i.
It is outright credit sale goods.
ii.
The buyer has the facility to pay the
price in installment over a period of time.
iii.
The buyer gets immediate possession as
well as ownership of the goods.
iv.
In the event of default by the buyer in
the payment of any installment, the seller cannot repossess the goods.
v.
In case of default, the total amounts of
installment paid by the buyer are not forfeited. The seller can only bring a
suit against the buyer for the unpaid installment.
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