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CMA Intermediate · Financial Accounting · Hire Purchase and Installment Sale Transactions

Gupta Traders bought equipment on hire purchase on 1 April 2024. Cash price is Rs 3,00,000, payable as Rs 1,00,000 down and two yearly installments at year end, with interest at 10% p.a. on the outstanding balance. The first installment is Rs 1,20,000 and the second clears the balance. What is the second installment?

The second installment is Rs 1,10,000. After the Rs 1,00,000 down payment, Rs 2,00,000 is due. Year one interest is Rs 20,000, so the first installment cuts principal by Rs 1,00,000. Year two interest on Rs 1,00,000 is Rs 10,000, giving a final payment of Rs 1,10,000.

  1. ARs 1,10,000Correct
  2. BRs 1,20,000
  3. CRs 1,00,000
  4. DRs 1,30,000

Explanation

Outstanding after down payment = 2,00,000. Interest year 1 = 20,000, so installment 1 of 1,20,000 reduces principal by 1,00,000 leaving 1,00,000. Interest year 2 = 10,000. The final installment = 1,00,000 + 10,000 = 1,10,000. Check: total interest 30,000 and total paid 1,00,000+1,20,000+1,10,000 = 3,30,000 = 3,00,000+30,000.

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