CMA Intermediate · Financial Accounting

Hire Purchase and Installment Sale Transactions for CMA Inter

In hire purchase, the buyer gets possession of goods now, pays in installments, and becomes owner only after the last installment. Each installment includes interest. To solve questions, find the cash price, split interest year by year, then pass entries under the full cash price or asset accrued method in both books.

What this chapter covers

This chapter in Financial Accounting deals with goods bought on credit where ownership does not pass at once. In a hire purchase agreement, the hire purchaser (buyer) takes the goods and pays the hire vendor (seller) in installments. Title passes only on payment of the last installment. Each installment has two parts: repayment of the cash price and interest. Your main job is to separate these two parts correctly.

You will learn to find the interest and installment amounts, then record the transaction in the buyer's books by two methods: the full cash price method and the asset accrued method. You will also handle default and repossession, where the seller takes the goods back, and small-value items where depreciation is not tracked item by item. The last topic, the installment payment system, differs because ownership passes at the time of sale.

The chapter connects to the rest of the paper through depreciation, fixed asset accounting, interest, and ledger and journal entries. The ledger skills carry over to other chapters. The interest calculation also supports finance topics you meet in other papers, so the time you spend here pays back elsewhere.

Hire purchase is a numerical chapter with a fixed pattern, so it is a good place to secure marks. A question can ask for a full set of ledger accounts, and you can earn step marks even if one figure goes wrong. The same few skills repeat: interest split, asset and vendor accounts, and repossession. They can also be tested in the 15 compulsory MCQs, where one concept such as who owns the asset or how interest is found decides the answer. With no negative marking, you should attempt every MCQ. Practice makes this chapter reliable.

Hire Purchase and Installment Sale Transactions: topics in the order to study them

1Hire Purchase Basics and Key TermsYou need the terms, rights of each party and the ownership rule before any calculation makes sense.
2Calculation of Interest and Installment AmountsEvery accounting entry depends on the interest figure, so master this before journal entries.
3Hire Purchase Accounting: Full Cash Price MethodHere the asset is recorded at the full cash price when the goods are delivered. The question specifies the method to use, so learn these entries first and know them well.
4Hire Purchase Accounting: Asset Accrued MethodLearn it after the first method so you can compare how the asset and vendor balances differ. Here the asset is recorded only at the cash price portion of installments paid and due (accrued), not at the whole cash price. The hire vendor account is credited with installments paid and due and shows the amount owed to date. Future installments not yet due are excluded. Depreciation is charged on the accrued asset value shown in the books.
5Default and Repossession of GoodsIt builds on the accounting methods, since you must know the asset's book value to find the gain or loss on repossession.
6Hire Purchase Transactions of Items of Small ValueThis is a shortcut treatment for many low-value items, so study it once the regular method is clear.
7Installment Payment SystemOwnership passes at sale here, so study it last to contrast it with hire purchase.

How to prepare Hire Purchase and Installment Sale Transactions

Treat this chapter as a numerical skill. Practice with pen and paper, not just reading solutions.

Write a one-page note on the key terms and on how hire purchase differs from installment sale, especially when ownership passes.
Practice the interest split until it is automatic: find total interest, then the interest in each installment, using the outstanding balance.
Solve one problem fully by the full cash price method: asset account, vendor account, interest suspense or interest account, and depreciation.
Solve the same problem by the asset accrued method and compare the two sets of entries to see the difference.
Do repossession problems by first finding the asset's book value on the date of default, then the amount at which the vendor takes it back, and the resulting gain or loss.
Attempt small-value items and installment payment questions after the main method feels comfortable.
Finish with timed mixed questions, writing neat ledger accounts with headings, dates and balancing figures, and attempt MCQs on the terms.

Common mistakes in Hire Purchase and Installment Sale Transactions

Charging interest on the full cash price every year instead of on the outstanding balance.
Fix: Draw a small table with opening balance, interest, installment and closing balance for each year, then use it for the entries.
Treating the installment as all principal or all interest.
Fix: Always split each installment into interest and cash price repaid before you pass any entry.
Mixing the two accounting methods in one answer.
Fix: Write the method name at the top, and check whether the asset is shown at full cash price or at the amount accrued.
Charging depreciation on the hire purchase price instead of the cash price.
Fix: Charge depreciation on the cash price, never on interest. Under the full cash price method it is on the full cash price; under the asset accrued method it is on the accrued asset value shown in the books. Book interest separately.
Wrong gain or loss on repossession because the book value on the date of default is not found.
Fix: First bring depreciation up to date, find the book value, then compare it with the repossession value.
Confusing hire purchase with installment sale in theory answers and MCQs.
Fix: Remember the test: ownership on last installment means hire purchase; ownership at sale means installment sale.

Last-day revision: Hire Purchase and Installment Sale Transactions

Hire purchase: possession passes at once; ownership passes only after the last installment is paid.
Installment sale: ownership passes to the buyer at the time of sale.
Each installment contains interest and part payment of the cash price.
Total interest = total hire purchase price − cash price.
Interest in each period is computed on the outstanding balance of the cash price.
Take the last year's interest as the balancing figure (last installment less the remaining cash price balance) to absorb rounding differences, so that total interest equals hire purchase price less cash price.
Full cash price method: the asset is debited at full cash price when delivered.
Asset accrued method: the asset is recorded only at the cash price portion of installments paid and due (accrued), not the whole cash price. The hire vendor account is credited with installments paid and due and shows the amount owed to date. Future installments not yet due are excluded.
Depreciation is charged on the cash price, never on interest. Under the full cash price method it is on the full cash price; under the asset accrued method it is on the accrued asset value shown in the books. Interest is booked separately as a finance cost.
On repossession, compare the book value of the asset with the value at which the vendor takes it back to find the gain or loss.
Small-value items are often handled in bulk without recording each item separately.
With no negative marking, attempt all 15 MCQs.

Hire Purchase and Installment Sale Transactions practice questions

Hire Purchase and Installment Sale Transactions in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CA IntermediateTypes of Financing

Hire Purchase and Installment Sale Transactions: frequently asked questions

What is the difference between hire purchase and installment sale?

In hire purchase, the buyer becomes owner only after paying the last installment, and can usually return the goods. In an installment sale, ownership passes to the buyer at the time of sale, and the buyer owes the price in installments.

Which method should I use if the question does not name one?

Follow the method the question asks for. If none is specified, state the method you assume at the top of your answer and apply it consistently. This lets the examiner follow your entries.

How do I find the interest in each installment?

Find the total interest as the hire purchase price less the cash price. Then calculate interest on the outstanding cash price balance each period, using the rate given. For the last installment, take interest as the balancing figure (installment less the remaining cash price balance) to absorb rounding, so total interest still equals hire purchase price less cash price.

Is this chapter useful for MCQs as well as written answers?

Yes. MCQs often test terms, ownership rules and the effect of repossession. There is no negative marking, so attempt every MCQ and use the written section to show full ledger accounts.