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How to treat insurance premium and repair amount on Hire Purchase System?


Hire purchase repair and maintenance cost: In hire purchase system the vendor is owner until the purchaser pay the full amount of goods. So, the repair and maintenance amount is paid by vendor. The vendor pays estimated amount of maintenance and repair amount and if the estimated repair amount is more than the actual amount then the surplus amount is adjusted with next year repair amount. And if the estimated amount is less than the actual amount of repair then the excess amount is charged from profit and loss a/c.
Example: Mr. Verma has purchased 2 machines on july 1st 2006 from Company X on hire purchase. The cash value of per machine is Rs. 20, 000. Mr. Verma pays Rs. 8, 000 each in 6 half yearly instalments. The total estimated amount of repair is Rs. 3, 500 in which Rs.600 is for first year, Rs. 700 is for second year, Rs. 300 for third year and Rs. 2,100. The actual total amount of repair and maintenance is Rs. 1, 900.  The repair expense of first year is Rs. 900, Rs. 700, Rs.300. The rate of interest is 7% p.a. Find out the interest amount in hire purchase and how much excess amount of repair and maintenance is charged from profit and loss a/c. The first instalment is paid on 31st December 2006.

Solution: Cash value = Rs. 40, 000
Hire purchase amount = Rs. 48, 000
Calculation of interest:
Time period
Calculation
Interest (In Rs.)
Instalment amount
(In Rs.)
1st half year
48, 000*7/100*6/12
= 1, 680
1, 680
8, 000
2nd half year
40, 000 * 7/100*6/12  
= 1, 400
1, 400
8, 000
3rd half year
32, 000* 7/100*6/12
= 1, 120
1, 120
8, 000
4th half year
24, 000*7/100*6/12
= 840
840
8, 000
5th half year
16, 000*7/100*6/12
= 560
560
8, 000
6th half year
8, 000*7/100*6/12
= 280
280
8, 000
Total

5, 880
48, 000

Estimated and Actual amount of Repair and Maintenance:
Years
Estimated repair and maintenance value (in Rs.)
Actual repair and maintenance value (in Rs.)
Excess amount charged from Profit & Loss a/c
(in Rs.)
31st  December 2006
300
900
600
31st June 2007
31st December 2007
300 + 350 = 650
+
350 + 150 = 500
= 1, 150
700
50
31st June 2008
31st December 2008
150 + 1, 050 = 1, 200
+
1,050 = 2, 250
300


Insurance Premium On hire purchase goods: The goods sold under hire purchase system is insured so, that the vendor can protect his goods from any loss. The vendor is the owner until the last payment of instalment is not paid by hire purchaser. So, initially he pays the insurance premium and later he charged the insurance premium amount from hire purchaser along with the instalment amount.
Default in payment of instalment (included insurance premium) by hire purchaser: The vendor has right to forfeit the goods by receiving permission from court. A vendor can fully repossession of goods from hire purchaser or repossess the partial goods if hire purchaser purchases lots of goods from vendor.


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