Question: X purchased a machine on hire purchased system.

15 Aug 2024,8:05 PM

 

X purchased a machine on hire purchased system. The total cash price of the machine is 31,960.down payment 8,000and three instalments of 12,000,10,000,4,000 payable at the end of the first, second and third year's respectively. Interest is charged 5% p. a. Charge depreciation at 10% on straight line method. Prepare ledger accounts in the books of x.

 

DRAFT/STUDY TIPS

Here are the steps to prepare the ledger accounts for X in the books under a hire purchase system:

Given Details:

• Total Cash Price of Machine: ₹31,960
• Down Payment: ₹8,000
• Three Installments:
  • Year 1: ₹12,000
  • Year 2: ₹10,000
  • Year 3: ₹4,000
• Interest Rate: 5% per annum
• Depreciation Rate: 10% (Straight Line Method)

Steps:

1. Interest Calculation:

   • Interest is charged at 5% per annum on the outstanding balance of hire purchase price at the beginning of each year.

2. Depreciation Calculation:

   • Depreciation is calculated using the straight-line method at 10% on the total cash price of the machine.

1. Machine Account

The Machine Account will record the full cash price as the cost, and depreciation will be charged yearly.

2. Hire Vendor Account

This account will record the down payment and installment payments, including any interest paid.

3. Interest Account

The interest account will accumulate the interest expense on the unpaid balance of the hire purchase price.

4. Depreciation Account

The Depreciation Account will record the annual depreciation.

Now, let's prepare the ledger accounts for 3 years.

(1) Machine Account

Date	Particulars	Debit (₹)	Credit (₹)	Balance (₹)
Year 1	To Hire Vendor A/c	31,960		31,960
Year 1	By Depreciation A/c		3,196	28,764
Year 2	By Depreciation A/c		3,196	25,568
Year 3	By Depreciation A/c		3,196	22,372

(2) Hire Vendor Account

Date	Particulars	Debit (₹)	Credit (₹)	Balance (₹)
Year 1	To Cash A/c (Down Payment)		8,000	23,960
Year 1	To Interest A/c (5% on ₹23,960)		1,198	25,158
Year 1	By Cash A/c (Installment)	12,000		13,158
Year 2	To Interest A/c (5% on ₹13,158)		658	13,816
Year 2	By Cash A/c (Installment)	10,000		3,816
Year 3	To Interest A/c (5% on ₹3,816)		191	4,007
Year 3	By Cash A/c (Installment)	4,000		7

(3) Interest Account

Date	Particulars	Debit (₹)	Credit (₹)	Balance (₹)
Year 1	By Hire Vendor A/c		1,198	1,198
Year 2	By Hire Vendor A/c		658	1,856
Year 3	By Hire Vendor A/c		191	2,047

(4) Depreciation Account

Date	Particulars	Debit (₹)	Credit (₹)	Balance (₹)
Year 1	To Machine A/c		3,196	3,196
Year 2	To Machine A/c		3,196	6,392
Year 3	To Machine A/c		3,196	9,588

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This ledger setup reflects the hire purchase system in the books of X, with interest accounted for on the outstanding amount, and depreciation charged using the straight-line method.