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

Under the asset accrued method (full cash price method) of hire purchase accounting in the books of the hire purchaser, at the time of delivery of the asset, which entry is passed?

The asset is debited and the hire vendor is credited with the cash price. The asset is capitalised at cash price because interest is a finance charge recognised over time, not part of asset cost.

  1. AAsset Account debited and Hire Vendor Account credited with the cash priceCorrect
  2. BAsset Account debited and Hire Vendor Account credited with total hire purchase price
  3. CHire Vendor Account debited and Asset Account credited with the cash price
  4. DAsset Account debited and Bank Account credited with the cash price

Explanation

In the asset accrued method the buyer records the asset at full cash price and creates a liability to the vendor for the same amount. Interest is booked separately as it accrues. Crediting the total HP price would wrongly include future interest in the asset cost.

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