Unit 1: Hire Purchase and Installment Account

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Questions and Answers

What condition must be met for ownership of goods to transfer from the hire vendor to the hire purchaser?

The goods must be used for a minimum period.

The hire purchaser must make a down payment.

All interest charges must be settled.

All installments must be paid in full. (correct)

What happens if the hire purchaser fails to pay an installment?

An additional fee is imposed but the vendor cannot seize the goods.

The hire vendor can seize the goods and adjust payments made against hire charges. (correct)

Ownership of the goods automatically transfers to the hire purchaser.

The hire vendor must give a grace period of six months.

In a hire purchase agreement, what is the term for the initial amount paid by the purchaser?

Installment

Total charge

Final payment

Down payment (correct)

How is the accounting treatment for hire purchase generally classified?

As an asset and liability transaction recognized immediately. Signup and view all the answers

Which of the following describes the installment purchase system?

Ownership passes to the buyer immediately on delivery of the goods. Signup and view all the answers

What is the nature of the monthly payments made by the hire purchaser in a hire purchase agreement?

They include both principal and interest charges. Signup and view all the answers

What is the common misconception about hire purchase agreements regarding ownership?

Ownership can be claimed at any time during the payment term. Signup and view all the answers

Which of the following best describes the term 'hire charges' in a hire purchase agreement?

Payments made by the hire purchaser for the use of goods. Signup and view all the answers

What occurs to ownership of goods in a Hire Purchase Contract?

Ownership is transferred only after all payments have been made. Signup and view all the answers

What happens in the event of non-payment in a Hire Purchase agreement?

The vendor has the right to recover the goods. Signup and view all the answers

What characterizes the accounting for Hire Purchase transactions?

Assets can be recorded at full cash price or the cash price actually paid. Signup and view all the answers

What term refers to the right of a vendor to reclaim an asset in a Hire Purchase agreement upon default?

Forfeiture Signup and view all the answers

In which situation would a Hire Purchase Contract be most beneficial to a purchaser?

When the purchaser intends to use the asset but lacks immediate funds for full payment. Signup and view all the answers

How are payments recorded in the books of a hire vendor?

As deferred revenue until the contract ends. Signup and view all the answers

What distinguishes an Installment Purchase Contract from a Hire Purchase Contract?

Ownership is transferred immediately in Installment Purchases. Signup and view all the answers

Which of the following statements about the accounting implication in Hire Purchase is correct?

The total liability at the start is equal to the cash price of the asset. Signup and view all the answers

What is the main difference in ownership transfer between hire purchase and installment purchase?

Ownership remains with the seller until the last installment is paid in hire purchase. Signup and view all the answers

Which of the following describes a key implication of the hire purchase system regarding goods recovery?

The seller retains rights to recover goods if payments are not completed. Signup and view all the answers

In the case of forfeiture of payments, what typically happens in a hire purchase contract?

The buyer loses all previous payments and rights to the asset. Signup and view all the answers

What do the accounting implications differ between hire purchase and installment purchase primarily affect?

Ownership recognition and treatment of asset and liability. Signup and view all the answers

Which term accurately describes a hire purchase system?

Ownership retained by the seller until final payment is made. Signup and view all the answers

Which of the following statements is true regarding installment purchases?

Ownership is transferred immediately after the first payment. Signup and view all the answers

Study Notes

Hire Purchase and Installment Account

Objectives of Unit 1: Understand concepts of hire purchase and installment systems, and distinguish between the two.

Hire Purchase System

A hire purchase contract involves two parties: the hire vendor (seller) and the hire vendee (buyer).
Goods are delivered to the buyer with the agreement of payment in installments.
Ownership of the goods transfers to the buyer only after the last installment is paid.
If the buyer misses a payment, the vendor can seize the goods and deduct amounts paid against hire charges.
Initial payment, also called down payment, is required before installments begin.
Example: For a television costing Rs. 15,000, an initial payment of Rs. 5,000 is followed by three monthly installments with 5% annual interest.

Installment Purchase System

Also known as the deferred installment system.
Immediate transfer of both possession and legal ownership to the buyer upon delivery.
The installment price includes both cash price and interest for delayed payment.

Differences between Hire Purchase and Installment Purchase

In hire purchase, ownership is retained by the seller until all installments are paid, whereas in installment purchase, ownership transfers immediately.
Hire purchase allows the vendor to reclaim goods for missed payments, while installment purchase does not have this provision.

Accounting Entries in Hire Purchase System

Objectives of Unit 2: Manage accounting entries for both hire vendor and hire vendee.
Two accounting methods for hire purchaser:
- Recording asset at full cash price: Considered the owner from the transaction outset.
- Recording asset at cash price actually paid: Reflects true cost incurred.

General Notes

The unit emphasizes understanding contracts and legal distinctions between payment systems.
Suggested readings and model questions are available for deeper learning.

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Description

This quiz focuses on the fundamentals of hire purchase and installment purchase systems as presented in Unit 1. It covers key concepts, differences between the two systems, and objectives to enhance understanding. Perfect for students looking to reinforce their knowledge of these financial concepts.