HIRE PURCHASE AND INSTALLMENT PURCHASE SYSTEM Dibrugarh University B.COM 1st Semester (CBCS) NOTES FINANCIAL ACCOUNTING UNIT -3




FINANCIAL ACCOUNTING
(CBCS)

UNIT -3


HIRE PURCHASE AND INSTALLMENT PURCHASE SYSTEM




Q1. What is Hire purchase system? What are its features?
Ans:
Hire Purchase System: Hire Purchase System is a system of retail business under which the seller agrees to sell the article on the condition that the buyer shall pay the purchase price by a fixed number of installments. Here the article is not legally sold out to the buyer and hence the ownership in the goods does not pass on to the buyer. The purchaser becomes the owner only on payment of the last installment.
Features of Hire Purchase System
1. Agreement: There is an agreement between the seller and the purchaser.
2. Possession: The possession of goods immediately passes from the seller to the buyer on signing the agreement.
3Installments: The buyer will make payment in installments over a period of time.
4. Ownership: The ownership of the goods will remain with the seller and passes to the buyer on the payment of last installment.
5. Constituents of Hire Purchase: Each installment is treated as hire charge till the last installment is paid.

6. Option to returning goods: The buyer has an option to return the goods to the seller has a right to repossess the goods sold on hire purchase and forfeit the amount already received either as down payment or in installments.
7. Repossession: If there is any default in payment of any installment, the seller has a right to repossess the goods sold on hire purchase and forfeit the amount already received either as down payment or in installments.

Q2. What is Installment purchase system? What are its features?
Ans:
Installment Purchase System: In Installment Purchase System, the possession as well as ownership passes from the seller to the buyer immediately on entering the agreement but the buyer agrees to pay the total price in installments. If the buyer makes any default in the payment of any installment, the seller has no right to repossess the goods. The seller can file a suit in the court of law for recovery of the price.

Features of Installment Purchase System
1. There is an agreement between the seller and the buyer.
2. The buyer is required to pay the total price in installments.
3. The buyer gets the possession and ownership of goods immediately on signing the agreement.
4. If there is any default in the payment of any installment, the seller has no right to repossess the goods. He can go to the court and sue the purchaser for unpaid balance.
5. As the purchaser is the owner of goods, he can dispose of the goods in any manner he likes.

Q3. What are the distinction between Hire Purchase System and Installment Purchase System?
Ans: Following are the main points of distinction between the two systems:


Q4. What are the distinction between Hire Purchase System and Credit Sales?
Ans: Following are the main points of distinction between the two systems:


Q5. What are the distinction between Installment Purchase System and Credit Sale?
Ans: Following are the main points of distinction between the two systems:

Q6. What are the advantages of Hire purchase system?
Ans: Following are the advantages of Hire purchase system:
Advantages to the Hire Buyer or Hire Purchaser
1. The Hire Purchaser acquires the immediate possession of goods on entering into an agreement and enjoys the goods before the full payment is made.
2. The buyer can generate fund if he use the goods productively which can be used in payment of the installments.
3. The hire purchaser enjoys the right to return the goods at any point of time; hence he has the opportunity to test the quality of the goods through actual use.

Advantages to the Hire Vendor or Hire Seller
1. The Hire Seller has an added security against the amount due from the buyer i.e. he has the right to take back the goods if the buyer fails to pay any installment.
2. Through the hire sales, new horizon of business has been created as it provides opportunity to the sellers to increase their sales volume and consequently to increase profit.
3. Adopting this system of sales enables the Hire Vendor to earn extra income in the form of interest which he generally charges from the Hire Buyer and thereby gets compensation for blockage of his capital.

Q7. What are the disadvantages of Hire Purchase system?
Ans: Following are the disadvantages of Hire Purchase system:

a. High price: The levy of interest by the hire vendor increases the total cost of the goods sold under hire purchase system, thereby making the goods costlier.
b. Requirement of huge capital: Hire purchase form of trade requires huge capital investment which is not affordable to all traders.
c. No right of ownership: As the buyer does not enjoy the right of ownership, he can neither sell nor mortgage the asset until the payment of the last installment.
d. Risk of bad debt: Since the goods sold under hire purchase system are expensive, the hire vendor runs the risk of bad debt if the hire purchaser makes default in payment of installments where the market value of the goods sold has decreased in the meantime.
e. Risk of financial strain on the buyer: It associates financial strain on the income of the buyer since he is to pay the periodical installments in time out of his income to avoid the risk of repossession by the seller.

Q8. Write short notes on:
1. Charging of depreciation in Hire Purchase System
In Hire Purchase System, depreciation is allowed to be charged on the assets used by the Hire Buyer. The basic logic is that the Hire Purchaser has the intention to own the asset till the payment of the last installment and use it for earning revenue in his business. Therefore it is necessary to provide depreciation on the asset so as to arrive at a correct profit. Basically, the charging of depreciation is done by either of the method:
          a. Straight line method or Original cost method. 
Or
          b. Written down value method or Diminishing Balance method or Reducing balance method.

2. Termination of Hire Purchase Agreement
The Hire Purchaser may, at any time, termination the hire purchase agreement after giving the owner at least 14 days notice in writing. He has to redeliver the goods to the owner and pay any installment of hire which might have become due before the termination. With a view to safeguarding the interest of the hirer, the Act has made the following provisions:
a. Where the sum total of the amount due in respect of the hire purchase price immediately before the termination, exceeds one-half of the hire purchase price, the hirer shall not be liable to pay the sum stated in the agreement;
b. Where the sum total of the amount paid and the amount due in respect of the hire purchase price immediately preceding the termination of the agreement does not exceed one-half of the hire purchase price, the hirer shall be liable to pay the difference between the said sum total and the said one-half, or the sum stated and the agreement whichever is lower.

3. Complete Repossession & Partial Repossession
When the hire purchaser makes default in the payment of installment, the hire vendor has a right to repossess the goods sold under hire purchase system. The essence of a hire purchase transaction is to transfer the ownership of goods to the hire purchaser only on the payment of last installment by him. On committing default in the payment of any installment, the hire vendor reserves the right to repossess the goods and the hire purchaser has to forfeit the installment already paid. The hire vendor repossesses either all the goods hired out or only a few of them. Repossession of all the goods is known as complete repossession and repossession a part or few of the goods is known as partial repossession.

4. Financial Lease: Financial lease is a long term lease usually coinciding with the economic life of the asset and is non-cancellable. It operates as a long term debt financing and is usually full-payout as is contrast to operating lease; it is usually a single lease repaying the cost of the asset. They pay a major role in financing of building and equipment to industries.

Q9. What are the rights of Hire Buyer or Hire Purchaser?
Ans: Following are the rights of Hire Buyer or Hire Purchaser:
a. Right to get possession of the goods: The hire purchaser has the right to get possession of the goods on the date of signing the agreement after making down payment, if any.
b. Right to purchase at any time with rebate (Section 9): The hirer may, at any time during the continuance of the hire-purchase agreement and after giving the owner not less than fourteen day’s notice in writing of his intention to do so, complete the purchase of the goods by paying or tendering to the owner the hire-purchase price or the balance due after rebate, if any, under the Act.
c. Right to terminate agreement at any time (section 10): The hirer has the right which he may exercise, at any time before the final payment under the hire-purchase agreement falls due, and after giving the owner not less than fourteen days’ notice in writing of his intention to do so and redelivering the goods to the owner, terminate the hire-purchase agreement by payment or tender to the owner of the amounts which have accrued due towards the hire-purchase price which have not been paid by him.
d. Rights of hirer in case of seizure of goods by owner (section 17): In case of seizure of goods sold under hire purchase, by the hire vendor, the hire purchaser may recover from the owner the amount, if any.

Q10. What are the rights of Hire seller or Hire Vendor?
Ans: Following are the rights of Hire seller or Hire Vendor:
a. Right to get full payment: The hire vendor has the right to receive the full payment of the agreed amount for the goods sold under hire purchase through installment payments on due dates as stipulated in the hire purchase agreement.
b. Right to forfeit the initial deposit: On termination of hire purchase agreement and subject to the provision in the hire purchase agreement, the hire vendor has the right to forfeit the initial deposit made by the hire purchaser.
c. Right to seize the goods: On termination of hire purchase agreement and subject to the provision in the hire purchase agreement, the hire vendor has the right to enter the premises of the hire purchaser and seize the goods sold on hire purchase.
d. Right to recover possession of the goods: On termination of hire purchase agreement, the hire vendor has the right to recover possession of the goods sold on hire purchase.

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