• From: India, Hyderabad
  • Registered: 02/07/2020
  • Posts: 1

Topic: Prepare necessary GL account for parties

Hi All,

I have a question below.

Raja purchased an asset under hire purchase system for 60,000 payments to be made 15,000 under down and 3 installments of 18,000 each at the end of each year. The rate of interest is 10% p.a. Raja depreciates assets @10% p.a on the diminishing balance method.

Due to financial difficulties, Raja could not pay any installment after the 1st installment and the selling company took possession of the asset. the selling company after spending 1,500 on repairs it sold away from the asset for 38,000.

Prepare necessary GL accounts in the books of both the parties.

Please help me with this.

Thanks

  • From: Singapore, India, Chennai
  • Registered: 05/02/2009
  • Posts: 6,165

Re: Prepare necessary GL account for parties

Assuming a single voucher for all transactions were entered as at the end of First Year, the broad parts would skeletally be:

On Purchase:
    By HP Co Cr 69000 (15K + 3 x 18K)
    To Fixed Asset Dr 60000
    To Interest Charges Dr 9000

On Down Payment: 
    By Checking Bank Account Cr 15000
    To HP Co Down Payment Dr 15000

On First Year End:
    By Fixed Asset Depreciation Cr 6900
    To First Year Depreciation Dr 6900

On First Installment Payment:
    By Checking Bank Account Cr 18000
    To HP Co First Installment (Principal + Interest) Dr 18000

On Repairs before sale:
    By HP Co Cr 1500
    To Repairs Dr 1500

On Repossession Sale:
    By Sale (repossession) Cr 38000
    To HP Co Repossession Dr 38000

Interest Reversion for balance period (assuming Simple Interest):
    By Interest Charges (refunded on repossession) Cr 6000
    To HP Co Interest waiver for balance term Dr 6000

Net Status of the Transaction:
Net Balance due from HP Co (excess sale value) : (15000 +18000 +6000 + 1500 + 38000)  - 69000 = 8000
On sale, Fixed Asset vanishes - 0 Value (Adjustment entry as needed)
No reversion of depreciation as it would become a true expense.

The above assumes that the repossession took place immediately after the payment of the first installment. In case the repossession and sale occurred after the second year, then additional interest and penalties will apply and the profits from sale will be appropriately get reduced.

Kindly pose your accounting questions to your auditor as this forum is not for teaching accounting.

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