Raja purchased an asset under hire purchase system for ` 60,000 paymen...
Explanation of Raja's Hire Purchase System
Initial Investment
- Raja purchased an asset under hire purchase system for ` 60,000
Payment Schedule
- Payments to be made ` 15,000 down and three installments of ` 18,000 each at the end of each year
Interest Rate and Depreciation
- Rate of interest is 10% p.a.
- Raja depreciated asset @ 10% p.a. on diminishing balance method
Situation After First Installment
- Due to financial difficulties, Raja could not pay any installment after the first installment
- The selling company took possession of the asset
Explanation
When an asset is purchased under a hire purchase system, the buyer (hirer) pays an initial down payment and agrees to make regular installment payments to the seller (owner). The ownership of the asset is transferred to the hirer only after the final installment payment is made.
In Raja's case, he purchased an asset for ` 60,000 and agreed to make four payments - an initial down payment of ` 15,000 and three installments of ` 18,000 each at the end of each year. The total amount paid by Raja over four years would have been ` 69,000 (15,000 + 18,000 + 18,000 + 18,000).
However, Raja faced financial difficulties and was unable to make any payments after the first installment. As a result, the selling company took possession of the asset.
Since Raja had already paid ` 15,000, the selling company would have calculated the balance amount due on the asset.
The balance amount due on the asset after the first installment would have been calculated as follows:
- Cost of asset = ` 60,000
- Down payment made = ` 15,000
- Amount financed = ` 45,000
- Interest rate = 10% p.a.
- Depreciation rate = 10% p.a.
Year 1:
- Opening balance = ` 45,000
- Depreciation = 10% of ` 45,000 = ` 4,500
- Closing balance = ` 40,500
Year 2:
- Opening balance = ` 40,500
- Interest = 10% of ` 40,500 = ` 4,050
- Depreciation = 10% of ` 40,500 = ` 4,050
- Closing balance = ` 36,450
Year 3:
- Opening balance = ` 36,450
- Interest = 10% of ` 36,450 = ` 3,645
- Depreciation = 10% of ` 36,450 = ` 3,645
- Closing balance = ` 32,760
The balance amount due on the asset after the first installment would have been ` 32,760.
Therefore, the selling company would have taken possession of the asset and would have the