CMA Intermediate · Financial Accounting · Hire Purchase and Installment Sale Transactions
Under the Hire Purchase system, when the hirer defaults in paying an installment and the vendor repossesses the goods, what is the legal and accounting position regarding the ownership of the goods before repossession?
The hirer becomes owner only on paying the final installment and exercising the option to buy. Until then the vendor remains owner, which is why the vendor may repossess the goods when the hirer defaults, unlike in an installment sale where title passes at delivery.
- AThe hirer is the owner from the date of the agreement
- BThe hirer becomes the owner only after paying the last installment and exercising the option to buyCorrect
- CThe vendor transfers ownership at the time of the first installment
- DOwnership passes to the hirer when delivery is taken
Explanation
In a hire purchase agreement the goods are delivered on hire and ownership passes to the hirer only after the last installment is paid and the option to purchase is exercised. Hence on default the vendor can repossess the goods as their owner. The other options describe a sale or installment purchase, where title passes earlier.
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