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

Meena Textiles acquires equipment with a cash price of ₹1,00,000 on hire purchase. It pays ₹20,000 at once and clears the balance in two year-end installments. Each installment is ₹40,000 of principal plus interest at 10% per annum on the balance outstanding at the start of the year. What interest is debited to the Profit and Loss account for year 1?

Year 1 interest is ₹8,000. The outstanding balance after the ₹20,000 down payment is ₹80,000, and 10% of that is ₹8,000. Interest is computed on the vendor's outstanding balance, not on the full cash price.

  1. A₹10,000
  2. B₹12,000
  3. C₹8,000Correct
  4. D₹4,000

Explanation

After the down payment, the vendor's balance at the start of year 1 is 1,00,000 − 20,000 = ₹80,000. Interest for year 1 = 10% × 80,000 = ₹8,000. Charging ₹10,000 wrongly applies the rate to the full cash price, ignoring the down payment. ₹4,000 is the year 2 interest.

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