Accounting Procedures For Early Terminate

Illustration of Accounting Procedures for Early

Termination

The buyer can terminate the hire purchase agreement earlier by paying
balance earlier than the last installment date.
However, the buyer may also be forced to terminate the agreement earlier if
the asset is scrapped due to its use.
Upon the termination of a hire purchase agreement, a number of entries
should be made in the books.
The Accounting treatments differ, depending on which method is used to
record hire purchase interest.

Summary of procedures

Dr HP creditor With the last payment to the HP creditor

Cr Bank

Dr HP interest With the HP interest and penalty charges

for early terminate of the hire purchase
Cr HP creditor contract

Dr Disposal With the cost of the asset

Cr Asset

Dr Provision for Transferring related depreciation provision

depreciation to the disposal Account
 Cr Disposal

Dr Bank With the insurance claim for the disposal

(if any)
Cr Disposal

Dr Profit and Loss With the loss on the disposal (Reverse the
entries for a profit on disposal)
Cr Disposal

2.4.2 Accounting Treatment For Early Terminate Due To :

a. Default in Installment Payment

Under the Hire Purchase Agreement, if the buyer failed to pay installment in a
period of 3 months, the seller will have a right to confiscate the goods. However,
the seller needs to send a notice before he is able to do so.

In Accounting terms, all Accounts related to the asset such as Assets Account,
Creditor Account, Hire Purchase Interest Suspense Account and Provision For
Depreciation Account need to be closed and the balance will be transferred to the
Asset Disposal Account. The balance left (which is the installment that not yet paid)
is considered as the selling price of the asset.

Account FoKsh.at

Asset A/C

Balance b/d x Asset disposal X

HP Creditor A/C
Asset disposal x Balance b/d X

Hire Purchase Interest Suspense (HPIS) A/C

Balance b/d x Asset disposal X

Provision for depreciation A/C

Asset Disposal Account x Balance b/d X

Asset disposal A/C

Asset x Creditor x

HPIS x Prov. for depreciation x

P&L: Profit on disposal x

x x
x x
Example 6:

The followings are Account balances in the book of buyer on 31 December 2010.

HP Creditor KSH.15,800

Asset KSH.25,000

Provision for depreciation KSH.3,600

The supplier has confiscated the car because the buyer had failed to pay monthly
installment on 1 April 2011.

Asset A/C

1/1/11 Balance b/d 25,00 1/4/11 Asset disposal 25,0

0 00

HP Creditor A/C

1/4/11 Asset disposal 15,8 1/1/11 Balance b/d 15,8

00 00

Provision for depreciation A/C

1/4/11 Asset disposal 3,60 1/1/11 Balance b/d 3,60

0 0

Asset disposal A/C

Asset 25,0 Creditor 15,8

00 00
 HPIS Prov. for depreciation 3,60
0

P&L: Loss on disposal

xx xx

b. Assets Destroyed in Accident

In a condition where by goods damaged due to accident, the insurance company

will pay compensation as an indemnity to the loss of goods.

In Accounting term, all the relevant Accounts need to be closed and the balance will
be transferred to the Asset Disposal Account.

Asset Disposal A/C

Asset X Insurance claim X

HPIS X Provision for depreciation X

P&L: Profit on disposal X Creditor X

X XX
X

Example 7 :

The creditors balance on 1 January 2011 was KSH.10,900. The car broke down due
to accident and the insurance company has paid an indemnity of KSH.18,000. The
supplier has received a sum KSH.11,200 as an early settlement to end up the
agreement. Balance in the Asset Account was KSH.25,000. The provision for
depreciation was KSH.2,500.

Asset A/C

1/1/11 Balance b/d 25,00 1/1/11 Asset disposal 25,0

0 00

HP Creditor A/C

1/1/11 Bank : early 11,2 1/1/11 Balance b/d 10,9

settlement 00 00

Asset disposal 300

11,2 11,2
00 00

Provision for depreciation A/C

1/1/11 Asset disposal 2,50 1/1/11 Balance b/d 2,50

0 0

Asset disposal A/C

Asset 25,0 Insurance claim 18,0

00 00

Creditor 300 Prov. for depreciation 2,50

 0

P&L: Loss on disposal 4,80

0

25,3 25,3
00 00

c. Assets Sold by Buyer

The treatment for asset sold by buyer is similar to early settlement.

d. Early Settlement of Amount Owed by The Buyer

Sometimes a buyer wants to settle up the hire purchase agreement immediately on

lump-sum payment. Therefore, the creditor Account should be closed separately.

In Accounting term, all relevant Accounts such as asset Account, HPIS Account and
provision for depreciation Account will be closed and the balance will be transferred
to asset disposal Account.

Example 8 :

The balance in the creditor Account was KSH.10,900 on 1 January 2011. The buyer
paid KSH.11,200 on lump-sum payment in order to end up the agreement.

Creditor A/C

1/1/11 Bank: early settlement 11,2 1/1/11 Balance b/d 10,9

00 00

Asset disposal 300

11,2 11,2
 00 00

Asset disposal A/C

Creditor 300 P & L (loss) 300

EXERCISES

QUESTION 1

You are required to prepare the relevant Accounts involved in the buyers book
(except cash Account) for the situations below :

(a) On 1 July 2011, Ahmad bought machinery on hire purchase from Peronda Bhd. The
cash price was KSH.25,000. Ahmad was required to pay deposit of KSH.5,000 and
the balance will be paid by equal installment for 12 months starting 31 July 2011
with interest rate of 20% per annum. Accounting year ends on 31 December every
year.

(b) Mr. Zaibo bought a motorcycle on hire purchase from Motor Company on 1
September 2010. The cash price was KSH.4,800. He was required to pay deposit of
KSH.1,200. The balances need to be paid by monthly installment for 3 years
including interest of 8% per year charged on the balance outstanding on 1
September 2010. The installment payment starting on 30 September 2010. The
depreciation of the motorcycle was 10% per year based on straight line method.
The financial years of the company ends on 31 August.

(c) On 1 July 2010, Abu & Co. bought machines on hire purchase from Syarikat Bakar.
The cash price of the machines was KSH.50,000. Abu & Co. was required to pay
deposit of KSH.5,000 followed by 5 installments of KSH.10,000 every half year. The
final installment was KSH.12,565. The interest rate was 20% per annum and
charged on the balance outstanding after every installment. The Accounting year
ends on 31 December each year.

(d) On 1 January 2013, Syarikat Mariam bought a tractor on hire purchase from
Syarikat Umar. The cash price for the asset was KSH.KSH.96,000. Under the hire
purchase agreement, a sum of KSH.115,782 needs to be settled off which consist of
 deposit of KSH.32,000 and 2 equal installments amounting to KSH.41,891 each and
to be paid on 31 December 2013 and 2014. The interest rate charged was 20% per
year on the balance at the end of every year. The Accounting year ends on 31
December every year.

(e) On 1 January 2013, GUNGYU Pvt. Ltd. bought a van on hire purchase from NSF Pvt.
Ltd. The cash price was KSH.70,000. Under the hire purchase agreement, GUNGYU
needs to pay KSH.75,000 which consists of deposit of KSH.30,000 and half year
installment of KSH.12,000, KSH.11,500, KSH.11,000 and KSH.10,500. The first
installment will be paid on 30 June 2013.

The hire purchase interest charged at a rate of 10% per annum, based on the
balance outstanding after every installment. The depreciation of the van was 10%
based on reducing balance method.

QUESTION 2 (End Of Hire Purchase Contract)

En. Zahid bought an audio set from Syarikat Elektronik on 1/1/12 on hire purchase.
The cash price was KSH.12,400. During the signing up of agreement, deposit that
has been paid was KSH.400. Payment need to be paid by 8 quarterly installments of
KSH.1,975 (1st installment will be paid on 31/3/12). The hire purchase interest was
spread evenly while the depreciation rate was 10%. On 1/4/13, En. Zahid has failed
to pay installments. Syarikat Elektronik has then confiscated the audio set. The
financial year ends on 31/12 every year. Prepare the relevant accounts.

QUESTION 3 (Selling Of Asset)

The financial year of Syarikat Linda Bhd ends on 30 June. On 1/1/11, the company
bought a mini bus from Mas Cyber Bhd with a cash price of KSH.50,000. Deposit
paid was KSH.20,000 and the balances were settled by 12 quarterly installments of
KSH.3,200 each quarter. 1st installment will be paid on 31/3/11. On 30/9/12, the
asset was sold at KSH.30,000 and the balance was paid by KSH.17,000 including the
installment as at that date. The company recorded and spread the interest evenly in
the Account. The depreciation rate was 20% on cost charged on the date of the
ownership. Prepare the relevant accounts.

QUESTION 4 (Asset Disposal)

En. Ahmad bought a lorry on hire purchase from Syarikat Kenderaan Bob. The
information on the asset was as follows:

Date of purchase : 1 January 2010

Cash price : KSH.40,000

Deposit : KSH.10,000

Installment : 2 times / KSH.12,920 each installment and the final

installment was KSH.12,926 paid at the end of every
year (3 years)

Interest : 14% on balance outstanding every year

On 31/10/2011, the lorry involved in an accident, the body was turned into pieces,
the engine crushed and all the tyres burst. The insurance company paid En. Ahmad
a sum of KSH.12,000 while En. Ahmad needs to pay KSH.28,000 to Syarikat
Kenderaan Bob as an early settlement. The depreciation rate was 20% based on
straight line method. Prepare the relevant accounts.

QUESTION 5 (Asset Disposal)

Syarikat ABC bought a vehicle from Syarikat Salman on 1/10/2011. The cash price
was KSH.46,000. The Accounting year ends on 31 December every year. A payment
of deposit has already been made at KSH.10,000. The interest rate was 15% per
annum deducted from the outstanding price of the asset. The installment made for
a period of 2 years. Interest was spread on sum of digit method. On 1/02/2012, the
Volvo involved in an accident and could not be used anymore. The company has
received an indemnity of KSH.42,000 from the insurance company. Syarikat ABC
agreed to pay KSH.30,450 to end up the hire purchase agreement from Syarikat
Salman. The depreciation rate was 12% per annum on cost. Prepare the relevant
accounts.