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

In the books of the vendor, which entry correctly records the repossession of goods from a defaulting hirer when the goods are taken back at a value lower than the balance due from the hirer?

Debit Goods Repossessed account at its taken-back value and debit Profit and Loss account with the shortfall, crediting the Hire Purchaser's account with the full balance due. This closes the hirer's account and records the loss on repossession.

  1. ADebit Goods Repossessed account and Profit and Loss account; credit Hire Purchaser's accountCorrect
  2. BDebit Hire Purchaser's account; credit Goods Repossessed account
  3. CDebit Goods Repossessed account; credit Profit and Loss account and Hire Purchaser's account
  4. DDebit Profit and Loss account; credit Goods Repossessed account

Explanation

The hirer's account is closed by crediting the full balance due. The goods are brought into stock at their reduced value by debiting Goods Repossessed, and the shortfall is debited to Profit and Loss as loss on repossession. The other entries do not close the hirer's account or do not capture the loss.

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