Hire Purchase/ledger entries

[u.maddock]

Hallo,

I just cannot get my head round the following (maybe my senior years have a lot to do with this!!) and hope someone can advise?

When an Asset is acquired on Hire Purchase, select the Ledger account into which the debit entries listed in questions
1 - 7 will be made.

1. Repairs
2. HP Price
3. Cash price
4. Interest paid in year
5. Insurance
6. Total HP interest payable
7. Installation cost

A - BANK B - EXPENSES [/b]C - CREDITORS D - NONE OF THESE

AND.......

When and Asset is acquired on Hire Purchase

Select the Ledger Account into which the Credit entries listed in questions 8 - 14 will be made.

8. Repairs
9. HP Price
10 Cash Price
11. Interest paid in year
12. Insurance
13. Total HP interest payable
14. Installation Cost

I really would appreciate any help and feedback you can give me - this double entry system really gets me so confused.

Thanks for reading my message.

Eunice

 

[gj]

Hi Eunice

I'm not sure that this format of question actually helps people to understand double entry. Here is what I beleive are the correct answers

1. Repairs EXPENSES
2. HP Price NONE OF THESE
3. Cash price NONE OF THESE
4. Interest paid in year EXPENSES
5. Insurance EXPENSES
6. Total HP interest payable NONE OF THESE
7. Installation cost NONE OF THESE

A - BANK B - EXPENSES [/b]C - CREDITORS D - NONE OF THESE

Explanation:
Repairs, Interest paid in year and insurance are all expenses to be shown in the profit & loss account and are debit entries per the question.
HP Price and Cash Price debits would go to the asset account. Installation cost would normally be treated as part of the cost of the machine and would be debited to the asset account. Total HP Interest payable would be debited to a deferred interest account,

and the credit entries

8. Repairs BANK
9. HP Price CREDITORS ie HP Account
10 Cash Price BANK (I assume they mean the deposit)
11. Interest paid in year NONE OF THESE
12. Insurance BANK
13. Total HP interest payable CREDITORS (Ie HP Account)
14. Installation Cost BANK

Explanation - repairs, cash deposit, insurance and installation would all be payments from the bank account.
The credit entry for the HP price (ie amount borrowed) is to the HP Account to set up the liability for that.
Interest paid in the year credit entry is to the deferred interest account - effectively releasing some that to the P&L for the year
Total HP interest payable credit entry is to the HP Account - ie the liability account to set up the liability for all the interest payable under the HP agreement

Hope that helps

If you haven't heard of a deferred interest account, post a reply and I will try to explain it differently - different manuals etc teach different ways of dealing with the interest!

Regards

Graham

 

[u.maddock]

Hallo Graham,

'Thank You' so much for your answers and more importantly, the explanations!!!!

Now, maybe I will get a decent night's sleep - you don't know how much I'm looking forward to this.

I really do appreciate the time you have given to my problem.

Warm regards

Eunice

 

[gj]

Hi Eunice

No problem - glad to have been of help


Regards


Graham