Skip to content

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

Kapoor & Co. purchased equipment on hire purchase on 1 January Year 1. Cash price is Rs 2,00,000, and it is payable in four annual installments of Rs 66,000 each, the first at the end of Year 1 (no down payment). Depreciation is 10% p.a. on the straight-line method on cash price, and interest is Rs 16,000 for Year 1. What total expense is charged to the Profit and Loss Account for Year 1?

The Year 1 charge is Rs 36,000, being depreciation of Rs 20,000 (10% of cash price) plus interest of Rs 16,000. The installment paid is not an expense; it reduces the liability to the vendor.

  1. ARs 36,000Correct
  2. BRs 20,000
  3. CRs 16,000
  4. DRs 66,000

Explanation

Depreciation = 10% of 2,00,000 = 20,000. Interest for Year 1 = 16,000. Total charge = 36,000. Rs 66,000 is the cash installment, which is not an expense; it only settles the liability. Using only depreciation or only interest omits one component.

Did you get it right without looking?

One question tells you little. A timed set on Hire Purchase and Installment Sale Transactions shows your real accuracy, how long you take and where you lose marks.

Practise Hire Purchase and Installment Sale TransactionsFree diagnostic mock

More Hire Purchase and Installment Sale Transactions questions