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

Ravi Traders buys a machine on hire purchase. The cash price is ₹1,20,000, a down payment of ₹30,000 is made at once, and three annual installments of ₹37,000 each follow. Under the full cash price method, at what amount is the machine recorded in the buyer's books on acquisition?

The machine is recorded at its cash price of ₹1,20,000. The full cash price method debits the asset at cash price and credits the vendor. The ₹21,000 excess of total payments over cash price is interest, charged to profit and loss over the term.

  1. A₹1,41,000
  2. B₹1,20,000Correct
  3. C₹90,000
  4. D₹1,11,000

Explanation

Under the full cash price method the asset is debited at its cash price, ₹1,20,000, with the vendor credited. The total paid is 30,000 + 3×37,000 = ₹1,41,000, so the ₹21,000 difference is interest, which is charged to the Profit and Loss account over the term and not capitalised. Recording ₹1,41,000 wrongly capitalises the interest.

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