Question

QUESTION 6

On 1 January 2018, Neon Bhd sold a packaging machine to Apex Bhd under a hire-purchase agreement. The cost and cash price of the packaging machine were RM18,000 and RM35,000, respectively. The agreement required a deposit of RM7,000 and further instalments of RM1,200 each month for 3 years starting from 31 January 2018.

On 1 December 2018, Neon Bhd discovered that Apex Bhd defaults on payments since October 2018. After serving 'the notice of intention to repossess' to Apex Bhd, the company repossessed the packaging machine on 31 December 2018, with repossession cost and storage cost of RM240 and RM100 respectively. Apex Bhd decided to let the goods be repossessed. The market price for the identical packaging machine is RM29,500.

Apex Bhd used gross method to account for the hire purchase and a straight line method to compute the interest expense. Neon Bhd employed sales method to account for hire purchase and a sum-of-the-years digit method to compute the interest revenue. Apex Bhd recognised the interest on each of the instalment date whereas Neon Bhd recognised the interest at the end of accounting period.

REQUIRED:

(Round all numbers to the nearest RM)

(a) Determine the hire-purchase price and total interest for Apex Bhd. Show your workings.

(b) Prepare the journal entries for Apex Bhd to record the transaction on 1 January 2018 and 31 January 2018.

(c) Compute the amount to be paid to or to be received from Apex Bhd for the settlement of the repossession on 31 December 2018.

(d) Following to the default payment, assume that the new accountant of Apex Bhd, Mr Anuar

refused to return the packaging machine as he stated that his company has possessed the packaging machine from the day of acquisition and that the ownership belongs to his company. Discuss on the appropriateness of Mr Anuar's action.

Answer 1

Amounts are in RM

(a)

Hire Purchase price = Down payment + Monthly installment x number of months

= 7,000 + 1,200 x 36

= 50,200

Total Interest = Hire purchase price - Cash price

= 50,200 - 35,000

= 15,200

(b)

Apex Bhd is the Hire purchaser

Journal entries

On 1st January

Machine (Hire purchase) 35,000

Deferred Interest 15,200

Accounts Payable 50,200

(Hire purchase of machinery accounted)

(We can also use Hire purchase payable instead of Accounts Payable)

Accounts Payable 7,000

Cash 7,000

(Deposit on hire purchase made)

On 31st January

Accounts payable 1,200

Cash 1,200

(1st installment on hire purchase paid)

Interest Expense 422.22

Deferred revenue 422.22

(Interest expense on Hire purchase accounted on Straight line basis)

(c)

In books of Hire Vendor

Balance of Apex

1)

= Cash price + Interest x (3/6)

= 35,000 + 15,200 (3/6)

= 42,600

(Under sum of years method, interest for the year is number of years remaining/total sum of years)

I.e., 3/(1+2+3) is to be multiplied

2)

Total receipt = 1,200 x 9 (only 9 months payments received) + 7,000

= 17,800

So balance is 24,800 (42,600-17,800). This amount will be treated as Goods Repossessed value.

Now, Goods repossessed amount

= 24,800 + repossession cost + storage cost

= 24,800 + 240 + 100

= 25,140

Fair value is 29,500

Gain on repossession = 29,500 - 25,140 = 4,360

As this resulted in gain, nothing is payable by Apex Bhd

(d)

In general, reposession will be taken place on defaulting of two or more successive installment by Hire purchaser. In the given case, as the defauy has happened the vendor has right to repossession and he can carry on repossession with full legal rights and also can sell the goods repossessed. The hire purchaser cannot deny vendors claim to repossess as he has not got the full owners right of the Hire purchased asset. The legal full rights on a hire purchy asset is deemed to be transferred to hire purchaser at the payment of last installment. During this hire purchase periods he is having a full usage rights but not full legal rights. So the accountant of hire purchase cannot refuse to return the machine.