Questions and Answers
What is the cash price of the plant and machinery in the transaction dated 1/4/2019 for Buyer A?
What is the amount of the down payment made by Buyer A in the first transaction?
What is the interest rate applied to the outstanding balance in the payments?
How many equal annual instalments are required for the second transaction?
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What depreciation rate is applied by Buyer P on the plant and machinery?
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Study Notes
Hire Purchase Transactions
- Cash price of Equipment & Machinery (P&M) is 200,000 DOP, with a down payment of 100,000 DOP paid on 1/4/2019.
- Remaining balance of 100,000 DOP to be paid in two equal annual installments commencing from 31/3/2020.
- Interest on remaining balance is charged at 15% per annum.
- Buyer P must apply depreciation at a rate of 10% per annum on the written down value (WDV).
Ledger Accounts for Buyer A
- Journal entries must include:
- Initial down payment of 100,000 DOP recorded as an asset acquisition.
- Recognition of the annual installments and interest expenses in subsequent years.
- Depreciation entries based on WDV calculated each year.
Hire Purchase of a Second Equipment
- Cash price of a second P&M is 300,000 DOP, with a down payment of 30,000 DOP paid on 1/4/2019.
- Balance of 270,000 DOP to be settled in three equal annual installments from 31/3/2020.
- Each installment amounts to Rs.118,254, which includes the principal and interest at 15% per annum.
- Like the first transaction, Buyer P is to apply depreciation at 10% per annum on WDV.
Ledger Accounts for Buyer A and Seller B
- Both buyers and sellers maintain separate ledger accounts.
- Seller Q records the sale of P&M and monitors the installment payments.
- Each transaction requires proper journal entries for cash received, outstanding balances, and interest income for Seller B.
- Closing accounts for both Buyer P and Seller Q occur on 31st March each year, reflecting the annual transactions and accrued interests.
Depreciation and Financial Reporting
- Recording depreciation affects the asset value on the balance sheet and the overall profit/loss figures in the income statement.
- Continual evaluation of WDV is crucial for accurate depreciation reporting.
- Year-end financial results should clearly reflect all payments made and remaining obligations for both parties involved.
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Description
Test your knowledge on accounting for hire purchase transactions, including cash price, down payments, installments, interest expense recognition, and depreciation. This quiz focuses on the ledger accounts for buyers under different scenarios and the accounting principles involved.
