Dinesh ltd on Ist april 2015 purchased a machine from rajesh ltd on hi...
HIRE PURCHASE BASIS
Introduction
Dinesh Ltd purchased a machine from Rajesh Ltd on hire purchase basis on 1st April 2015. The cash price of the machine was Rs. 25,000.
Payment Terms
The payment was to be made Rs. 5,000 on the date of the contract and the balance in your annual installment of Rs. 5,000 each plus interest at 5% per annum payable on Dec 31st each year. The first such installment being payable on 31st Dec 2015.
Depreciation
Depreciation is to be charged 10% on the original cost.
Explanation
Hire purchase is a type of installment purchase where the buyer agrees to pay for goods in parts, over a period of time. In this case, Dinesh Ltd purchased a machine from Rajesh Ltd on hire purchase basis.
The total cost of the machine was Rs. 25,000. Dinesh Ltd paid Rs. 5,000 on the date of the contract and agreed to pay the balance amount in annual installments of Rs. 5,000 each. The interest rate was 5% per annum, and the first installment was to be paid on 31st Dec 2015.
Apart from the annual installments, Dinesh Ltd also had to pay depreciation on the machine. The depreciation rate was 10% on the original cost. This means that Dinesh Ltd would have to reduce the value of the machine by 10% every year.
Conclusion
Hire purchase is a common way of purchasing goods, especially expensive items like machinery and vehicles. It allows buyers to spread the cost over a period of time, making it more affordable. However, it is important to read and understand the terms of the agreement before entering into a hire purchase contract.