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

Sunrise Traders bought a machine on hire purchase under the full cash price method. It defaults, and the vendor repossesses the machine in full settlement. At that date the machine's book value is ₹45,000 and the balance due to the vendor is ₹40,000. What is the result in the buyer's books?

The buyer records a loss of ₹5,000. The vendor's balance of ₹40,000 is cleared and the asset carried at ₹45,000 is removed. The ₹5,000 by which the book value exceeds the liability settled is charged to profit and loss.

  1. AProfit of ₹5,000
  2. BLoss of ₹45,000
  3. CLoss of ₹5,000Correct
  4. DNo profit or loss

Explanation

On repossession the vendor account is debited ₹40,000 to clear the liability and the machine account is credited ₹45,000. The shortfall of ₹5,000 is debited to the Profit and Loss account as a loss on repossession. A profit would arise only if the vendor balance exceeded the book value.

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