This document provides information about accounting for hire purchase transactions in Malaysia. It discusses the key rules and definitions under the Hire Purchase Act 1967, and outlines the accounting treatment for hire purchase transactions from the perspective of both the hirer/purchaser and the owner/seller. The hirer/purchaser is required to recognize the asset, a payable to the owner, interest expense over the term of the agreement, and account for default situations. The owner/seller recognizes revenue from the sale, interest income over time, and calculates gross profit based on collections from the hirer. Journal entries are provided to illustrate the accounting entries for various hire purchase scenarios.
contents : ways and consequences of dissolving a partnership
P/S : Hi, I am sharing my personal notes of law-related subjects. Some parts of them are explained in a very informal-relaxed way and mix of languages (BM and English). Secondly, as law revolves every day, there will be outdated parts in my notes. Two ways of handling it.. (1) double check with the latest law and keep it to yourself (2) same with No. 1 coupled with your generosity to share with us, the LinkedIn users (hiks ^_^). Till then, have a nice day!
contents : ways and consequences of dissolving a partnership
P/S : Hi, I am sharing my personal notes of law-related subjects. Some parts of them are explained in a very informal-relaxed way and mix of languages (BM and English). Secondly, as law revolves every day, there will be outdated parts in my notes. Two ways of handling it.. (1) double check with the latest law and keep it to yourself (2) same with No. 1 coupled with your generosity to share with us, the LinkedIn users (hiks ^_^). Till then, have a nice day!
Describe the environment related to leasing transactions.
Explain the accounting for leases by lessees.
Explain the accounting for leases by lessors.
Discuss the accounting and reporting for special features of lease arrangements.
Accounting for Leases
Unit-III
Leasing Environment:
A lease is a contractual agreement between a lessor and a lessee. This arrangement gives the lessee the right to use specific property, owned by the lessor, for a specified period of time. Lessee makes the payment to the lessor in return over the lease term for the use of the property.
The largest group of leased equipment involves Information technology, Transportation (trucks, motor cars), Construction and Agriculture.
Who are the Lessors? The lessors that own this property generally fall into one of following three categories:
1. Banks.
2. Captive leasing companies.
3. Independents.
Advantages of Leasing:
1. 100% financing at Fixed Rates: Leases are often signed without initial amount from the lessee. In addition, lease payments often remain fixed which protects the lessee against inflation and increases in the cost of money.
2. Protection against Obsolescence: Leasing equipmentreduces risk of obsolescence to the lessee, and in many cases passes the risk of residual value to the lessor.
3. Flexibility: Lease agreements may contain less restrictive provisions than other debt agreements. For example, the duration of the lease may be anything from short period of time to the entire expected economic life of the asset. The payment of rent in most cases is set to enable the lessor to recover the cost of the asset plus a fair return over the life of the lease.
4. Less Costly Financing: Some companies find leasing cheaper than other forms of financing. This may reduce the tax burden of the companies. Through leasing, the leasing companies or financial institutions use these tax benefits. They can pass some of these tax benefits back to the user of the asset in the form of lower rental payments.
5. Tax Advantages: For financial reporting purposes companies do not report an asset or a liability for the lease arrangement. For tax purposes, however, companies can capitalize and depreciate the leased assets.
6. Off-Balance-Sheet Financing: Some leases do not add debt on a balance sheet or affect financial ratios. But they may be added to borrowing capacity.
Accounting by the Lessee: Lessee capitalizes a lease; it records an asset and a liability generally equal to the present value of the rental payments. Lessor having transferred substantially all the benefits and risks of ownership recognizes a sale by removing the asset from the balance sheet and replacing it with a receivable.
Capitalization Criteria (Lessee): In order to record a lease as a capital lease, the lease must be non cancelable. In addition, it must meet one or more of the following four criteria.
1. Transfers ownership to the lessee.
2. Contains a bargain purchase option.
3. Lease term is equal to or greater than 75 percent of the estimated economic life of the leased property.
4. The present value of the minimum lease payments (excluding executor costs) equals .
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2. BKAF3063 A141 2
Chapter Outline
☞ Procedures and rules under Hire Purchase Act 1967.
Definition
hire purchaser rights
seller’s right
☞ Accounting by purchaser/hirer:
recognition of interest expense
repossession
☞ Accounting by seller/owner:
recognition of interest revenue and gross profit
repossession
☞ Disclosure requirements
.
3. BKAF3063 A141 3
Learning Outcomes:
By the end of this chapter, students should be
able to:
Explain the nature of hire purchase
Journalize the entry using gross method
Explain the treatment for hire purchase in
different situations
Explain the disclosure requirements
4. BKAF3063 A141 4
Definition
Hire Purchase Act 1967:
“Hire purchase agreement” includes a letting of goods with an
option to purchase and an agreement for the purchase of goods by
instalments.
Legal view:
Hire Purchase is a system of acquiring goods on credit whereby
The seller of the goods is regarded as the dealer, the purchaser is
regarded as the hirer and the finance company as the owner.
www.lawyerment.com.my
5. BKAF3063 A141
5
Hire-Purchase Act 1967
☺ Hirer:
- The person who takes goods from the owner under a
hire-purchase agreement.
☺ Owner:
- a person who lets a goods to a hirer under a hire-purchase
agreement.
☺ Hire purchase price:
- the total sum payable by the hirer under a hire-purchase
agreement in order to complete the purchase of goods.
☺ Minimum deposit:
- no minimum deposit prescribed, it should not less than
one-tenth (10%) of the cash price of the goods.
6. BKAF3063 A141 6
Hire-Purchase Act 1967
☺ Details must be stated in agreement:
1) specify a date on which the hiring shall be deemed to have
commenced.
2) specify the number of instalments to be paid under the
agreement by the hirer.
3) specify the amount of each of instalments and the person whom
and the place at which the payments of these instalments are
to be made.
4) specify the time for the payment of each of those instalments.
5) contain a description of the goods sufficient to identity them.
6) specify the address where the goods under the hire purchase
agreement are.
7. BKAF3063 A141 7
Hire-Purchase Act 1967
☺ Among others, it must also set out in tabular form:
1) cash price
2) freight or delivery charges if any
3) vehicle registration fees
4) insurance
5) terms charges or interests
6) the annual percentage rate for terms charges
7) the balance originally payable under the agreement
8) the total amount payable.
8. BKAF3063 A141 8
Hire-Purchase Act 1967
Only the following goods can be bought on hire purchase in
Malaysia :
1) all consumer goods
2) motor vehicles namely
3) invalid carriages
4) motor cycles
5) motor cars including taxi cabs and hire cars
6) goods vehicles where the maximum permissible laden weight
does not exceed 2,540 kilograms
7) buses, including stage buses
9. BKAF3063 A141 9
Hire-Purchase Vs Credit Sales
Hire-purchases Credit sales
Ownership of the
asset
Not transferred Transferred
Return of goods Returnable Not returnable
Repossession of
goods
Yes No
11. BKAF3063 A141 11
HP in the Book of Hirer
Substance over form.
Hire-purchase price = Cash price + interest
or
= Deposit + instalments amount
Depreciation: cost over useful life of the asset.
Method of recording:
1. Net Method
2. Gross Method
Cost of asset = cash price
12. BKAF3063 A141 12
Hirer : Interest
Interest rate: should not be more than 10% per annum.
Total interest = hire-purchase price - cash price
Matching principle applied: interest need to be amortised.
Method of amortization:
1) Actuarial / effective interest / residual balance
2) Sum-of-the-years digit
3) Straight line
13. BKAF3063 A141 13
Hirer : Interest
Illustration 1:
On 1 July 2013, Abric Berhad purchased a machine under
hire-purchase agreement with Banker Berhad. The company
paid deposit of RM1,000 and further instalments of RM902
per month for 5 months starting from 31 July 2013. The cash
price of the machine is RM5,400. Interest rate charged is 6%
per year. The current effective interest rate is 0.83% per
month.
14. BKAF3063 A141 14
Hirer : Interest
Solution to Illustration 1:
HP price = cash deposit + instalments
= 1,000 + (902 x 5)
= RM5,510
Interest = HP price – Cash price
= 5,510 – 5,400
= RM110
Interest amortization?
16. BKAF3063 A141 16
Hirer : Interest
Illustration 2:
On 1 July 2013, Jobfast Berhad. purchased a delivery van
under hire-purchase agreement with Banker Berhad. The
company paid deposit of RM20,000 and further instalments of
RM5,200 per month for 6 months starting from 31 July 2013.
The cash price of the delivery van is RM50,000. Interest rate
charged is 8% per year.
17. BKAF3063 A141 17
Hirer : Interest
Solution to Illustration 2:
HP price = cash deposit + instalments
= 20,000 + (5,200 x 6)
= RM51,200
Interest = HP price – Cash price
= 51,200 – 50,000
= RM1,200
Interest amortization?
18. BKAF3063 A141 18
Hirer : Interest
2. Sum-of-the-years digit:
Amortization of interest:
Number for specific instalments x total interest
Total number of instalments
n(n+1) = 6(6+1) = 21
2 2
Inst. Calculation Interest (RM)
1 (6/21) x 1,200 343
2 (5/21) x 1,200 286
3 (4/21) x 1,200 229
4 (3/21) x 1,200 171
5 (2/21) x 1,200 114
6 (1/21) x 1,200 57
19. BKAF3063 A141 19
Hirer : Interest
2. Straight-line:
Amortization of interest = 1,200 / 6 = RM200 per month
Total interest .
Total number of instalments
20. BKAF3063 A141 20
Hirer : Net Method
Dr. Asset (cash price) 50,000
Cr. Account payable 50,000
(To record amount payable to seller – cash price)
Dr. Account payable 20,000
Cr. Cash 20,000
(To record payment of deposit)
Dr. Interest expense 343
Cr. Account payable 343
(To record interest expense)
Refer to Illustration 2: using sum-of-the-years method
Dr. Account payable 5,200
Cr. Cash 5,200
(To record payment of instalment)
1 July 2013
31 July 2013
21. BKAF3063 A141 21
Hirer : Gross Method
Dr. Asset (cash price) 50,000
Deferred interest 1,200
Cr. Account payable 51,200
(To record amount payable to seller – hp price)
Dr. Account payable 20,000
Cr. Cash 20,000
(To record payment of deposit)
Dr. Interest expense 343
Cr. Deferred interest 343
(To record interest expense)
Refer to Illustration 2: using sum-of-the-years method
Dr. Account payable 5,200
Cr. Cash 5,200
(To record payment of instalment)
1 July 2013
31 July 2013
22. BKAF3063 A141 22
HP in the Book of Hirer
Situations:
1. HP complete as per contract.
2. Hirer fails to pay instalment
defaults & repossession
23. BKAF3063 A141 23
Hirer:Default and Repossession
S16 - Owner has a right to repossess asset if:
S16(1): hirer fails to pay 2 instalments
consecutively or fail to pay last instalment.
Notice should be given to hirer to notify about the
repossession (Schedule 4). Owner has the right to
repossess asset after 21 days of notification.
S16(2): owner feel suspicious that asset will
be transferred to another place other than
place which stated in contract .
24. BKAF3063 A141 24
Hirer:Default and Repossession
S16A- If asset is returned within 21 days of
notification, the hirer would not bear any cost related
to the repossession, storage and other cost.
S16(3): Alternatives given to hirer:
a) renew the contract; or
b)settle contract before maturity date; or
c) let owner to repossess goods.
25. BKAF3063 A141 25
Hirer:Default and Repossession
a) renew the contract:
Payment to be made:
instalment in arrears
(+) interest in arrears
(+) storage/custody/repair cost
(+) repossession cost
(+) redelivery cost
26. BKAF3063 A141 26
Hirer:Default and Repossession
b) settle contract before maturity date:
Payment to be made:
Hire-purchase price xx
(-) (deposit + instalment paid) xx
(-) statutory rebate xx
(+) storage/custody/repair cost xx
(+) repossession cost xx
27. BKAF3063 A141 27
Hirer:Default and Repossession
☞ Illustration 3:
On 1 January 2013, Shellix Berhad. purchased a drilling machinery under a
hire-purchase agreement with Fortune Berhad. The cash price of the
machinery is RM70,000 with estimated useful life of 10 years. The company
paid deposit of RM20,000 and further instalments of RM4,375 per month for
12 months starting from 31 January 20013. Interest rate charged is 5% per
year.
On 15 September 2013, Shellix Berhad received a notice to repossess by the
Fortune Berhad due to its failure to pay the last two instalments (July &
August). 21 days later, the company decided to make a payment to settle the
contract. The storage and repossession costs to be borne were RM200 and
RM350 respectively.
28. BKAF3063 A141 28
Hirer:Default and Repossession
Solution to Illustration 3:
Payment to be made:
Hire-purchase price 72,500
(-) deposit + instalment paid 46,250
(-) statutory rebate 192
(+) storage/custody/repair cost 200
(+) repossession cost 350
26,608
20,000 + (4,375 x6)
3(3+1) / 2 x 2,500
12(12+1) / 2
29. BKAF3063 A141 29
Hirer:Default and Repossession
☞ Solution to Illustration 3:
Journal entries:
Dr. Account payable 26,250
Interest expense 481
Loss on hp settlement 550
Cr. Cash 26,608
Deferred interest expense 673
(6+5+4+3+2+1)/78 x 2,500
(6+5+4)/78 x 2,500
30. BKAF3063 A141 30
Hirer:Default and Repossession
c) let owner to repossess goods:
if:
Repossess good’s value
+ total paid
Total net payable>
hirer can claim the excess,
vice versa, hirer must pay
original unpaid balance
(hp price)
() statutory rebate
1. reasonable best price, or
2. price to pay by a new hirer by cash
minus: - repossession cost
- storage cost
- sales cost/written-off goods
31. BKAF3063 A141 31
Hirer:Default and Repossession
Illustration 4:
Using the same information in Illustration 3:
On 10 September 2013, Shellix Berhad received a notice to
repossess by Fortune Berhad due to its failure to pay the last two
instalments (July & August). The machinery was then taken
back by the owner on 1 October 2013 and incurred the following
cost: Storage RM200, reselling RM500, and repossession cost of
RM350. The price of the machinery at the repossession date was
RM30,000.
32. BKAF3063 A141 32
Hirer:Default and Repossession
☞ Solution to Illustration 4:
Journal entries?
Repossess good’s value + total paid
= [30,000 – (200 + 500 + 350)] + (4,375 x 6)
= RM55,200
Total net payable = (4,375 x 12) - 192
= 52,308
3(3+1) / 2 x 2,500
12(12+1) / 2
Total claimable = 55,200 – 52,308
= 2,892
Amount receivable from owner
33. BKAF3063 A141 33
Hirer: Default and Repossession
Journal entries on the date of repossession:
1 Oct 2013 Dr. Interest expense 481
Cr. Deferred interest 481
[(6+5+4)/78 x 2,500]
Dr. Depreciation expense 5,250
Cr. Accumulated depreciation 5,250
(70,000 x 10% x 9/12)
Dr. Cash 2,892
Account payable 26,250
Accumulated depreciation 5,250
Loss on repossession 35,800
Cr. Deferred interest expense 192
Machinery 70,000
35. BKAF3063 A141 35
HP in the Book of Owner
Use sales method:
Account receivables
Revenue: - Gross profit (Cash price – COGS)
- Interest revenue (Hp price – Cash price)
Inventory method:
No receivables to be recorded – only when no
payment received for expired instalment.
36. BKAF3063 A141 36
HP in the Book of Owner
Interest revenue: to defer and contra with AR.
Gross profit:
Immediate recognition
based on collection
Journal entries on the agreement date:
Dr. Accounts receivable xxx
Cr. Sales revenue xxx
Deferred interest revenue xxx
HP price
Cash price
HP price – Cash price
37. BKAF3063 A141 37
Owner:Recognition of Gross Profit
Recognition based on collection:
Gross Profit Realized
= Gross profit x (collection – interest recognized)
Cash price
38. BKAF3063 A141 38
Owner:Recognition of Gross Profit
☞ Illustration 5:
On 1 May 2013, Hijau Berhad sold a risographic machine to
Merah Berhad on hire purchase. The cost and cash price of
the machine is RM7,000 and RM9,500 respectively. The
interest rate used is 10% per year. The agreement requires a
cash deposit of RM1,000 and 11 monthly instalments of
RM780 starting from 31 May 2013 and final instalment of
RM770.
Hijau Berhad closes its account on 31 December each year.
39. BKAF3063 A141 39
Owner:Recognition of Gross Profit
☞ Solution to Illustration 5:
Journal entries?
HP price = (780 x 11) + 770 + 1,000
= RM10,350
Total interest = 10,350 – 9,500
= RM850
GP = 9,500 – 7,000
= RM2,500
40. BKAF3063 A141 40
Owner:Recognition of Gross Profit
Journal entries: Immediate recognition
1 May 2013
31 May –
30 Nov 2013
Dr. Accounts receivable 10,350
Cr. Sales revenue 9,500
Deferred interest revenue 850
Dr. COGS 7,000
Cr. Inventory 7,000
Dr. Cash 1,000
Cr. Accounts receivable 1,000
Dr. Cash 780
Cr. Accounts receivable 780
41. BKAF3063 A141 41
Owner:Recognition of Gross Profit
Journal entries:
31 Dec 2013
Dr. Deferred interest revenue 741
Cr. Interest revenue 741
(12+11+10+9+8+7+6+5)/78 x 850
Dr. Income summary 7,000
Cr. COGS 7,000
Dr. Cash 780
Cr. Accounts receivable 780
May - Dec
Dr. Sales revenue 9,500
Cr. Income summary 9,500
Dr. Interest revenue 741
Cr. Income summary 741
42. BKAF3063 A141 42
Owner:Recognition of Gross Profit
Hijau Berhad
Income Statement
For the year ended 31 Dec 2013 (partial)
Sales revenue 9,500
Less: COGS 7,000
Gross profit 2,500
Other income:
Interest revenue 741
Hijau Berhad
Balance Sheet
31 Dec 2013 (partial)
Current Assets:
Account receivable 3,110
Less: Deferred interest revenue 109
3,001
10,350 - 1,000 - (780x8)
850 - 741
43. BKAF3063 A141 43
Owner:Recognition of Gross Profit
Journal entries: Recognition based on collection
1 May 2013
31 May –
30 Nov 2013
Dr. Accounts receivable 10,350
Cr. Sales revenue 9,500
Deferred interest revenue 850
Dr. COGS 7,000
Cr. Inventory 7,000
Dr. Cash 1,000
Cr. Accounts receivable 1,000
Dr. Cash 780
Cr. Accounts receivable 780
44. BKAF3063 A141 44
Owner:Recognition of Gross Profit
31 Dec 2013
Dr. Deferred interest revenue 741
Cr. Interest revenue 741
Dr. Deferred Gross Profit 7,000
Cr. COGS 7,000
Dr. Cash 780
Cr. Accounts receivable 780
Dr. Sales revenue 9,500
Cr. Deferred Gross Profit 9,500
Dr. Interest revenue 741
Cr. Income summary 741
45. BKAF3063 A141 45
Owner:Recognition of Gross Profit
31 Dec 2013
Dr. Deferred Gross Profit 1, 710
Cr. Gross Profit realized 1,710
Dr. Gross Profit realized 1,710
Cr. Income summary 1,710
2,500 x 6,499
9,500
[1,000 + (780 x 8)] - 741
46. BKAF3063 A141 46
Owner:Recognition of Gross Profit
Hijau Berhad
Income Statement
For the year ended 31 Dec 2013 (partial)
Gross profit realized 1,710
Other income:
Interest revenue 741
Hijau Berhad
Balance Sheet
31 Dec 2013 (partial)
Current Assets:
Account receivable 3,110
Less: Deferred interest revenue 109
Deferred GP 790
2,211
2,500 – 1,710
47. BKAF3063 A141 47
Owner:Repossession
Journalize the closing entries for:
Accounts Receivable
Deferred interest
Deferred GP
Transfer to Repossession account.
Recognize gain or loss from repossession.
48. BKAF3063 A141 48
Owner:Repossession
☞ Illustration 6:
Refer to Illustration 5.
Assume Hijau Berhad has repossessed the asset on 1 April
2014 due to failure of Merah Berhad to settle the arrears
since January 2014. Merah Berhad also failed to return the
assets after 21 days receiving notice of repossession. The best
value of the asset at the date of the repossession is RM7,800.
Hijau Berhad charged Merah Berhad for repossession charge
of RM360, storage RM150 and repair of RM230. The selling
cost of the machine is expected to be RM600.
49. BKAF3063 A141 49
Owner:Repossession
☞ Solution to Illustration 6:
Journal entries?
Repossess good’s value
= 7,800 – (360 + 150 + 230 + 600)
= RM6,460
Total net receivable = 10,350 - 11
= RM10,339
Total claimable (hirer) = (6,460 + 7,240) – 10,339
= RM3,361
Total payment = 1,000 + (780 x 8)
= RM7,240
1(1+1) / 2 x 850
12(12+1) / 2
Amount to be paid to hirer
50. BKAF3063 A141 50
Owner:Repossession
Journal entries: Immediate recognition
1 April 2014
Dr. Deferred interest revenue 11
Cr. Accounts receivable 11
(Record statutory rebate April 2014)
Dr. Repossession account 3,099
Cr. Accounts receivable 3,099
(Close accounts receivable)
Dr. Deferred interest revenue 98
Cr. Interest revenue 98
(Recognize interest rev. for Jan, Feb & March 2014)
(4+3+2) / 78 x 850
Dr. Inventory 7,200
Cr. Repossession account 7,200
(Record the repossess asset)
7,800 - 600
51. BKAF3063 A141 51
Owner: Repossession
Journal entries: Immediate recognition
1 April 2014 Dr. Repossession account 740
Cr. Cash 740
(Record the repossession, storage & repair expenses)
Dr. Repossession account 3,361
Cr. Cash 3,361
(Record payment claimable by hirer)
52. BKAF3063 A141 52
Owner: Repossession
Journal entries: Based on collection
1 April 2014
Dr. Deferred interest revenue 11
Cr. Accounts receivable 11
(Record statutory rebate April 2014)
Dr. Repossession account 3,099
Cr. Accounts receivable 3,099
(Close accounts receivable)
Dr. Deferred interest revenue 98
Cr. Interest revenue 98
(Recognize interest rev. for Jan, Feb & March 2014)
Dr. Inventory 7,200
Cr. Repossession account 7,200
(Record the repossess asset)
7,800 - 600
53. BKAF3063 A141 53
Owner: Repossession
Journal entries: Based on collection
1 April 2014 Dr. Repossession account 740
Cr. Cash 740
(Record the repossession, storage & repair expenses)
Dr. Repossession account 3,361
Cr. Cash 3,361
(Record payment claimable by hirer)
Dr. Deferred GP 790
Cr. Repossession account 790
(Close Deferred GP account)
54. BKAF3063 A141 54
Owner: Repossession
Journal entries: Based on collection
1 April 2014
Dr. Repossession account 790
Cr. Income summary 790
(Record gain on repossession)