Question

What is meant by default and repossession in Hire Purchase Accounts? Describe the Accounting treatment for default and repossession with suitable example.

23 Jan 2022
Answer :
Word Count : 1133

Default and Repossession in Hire Purchase Accounts:

Hire purchase is a common method of financing the acquisition of assets, particularly in the context of durable goods like vehicles and machinery. In a hire purchase agreement, the seller (often referred to as the hire vendor) allows the buyer (hirer) to use the asset while paying for it in installments. However, default and repossession are two critical aspects of hire purchase agreements that both parties need to understand and account for.

1. Default in Hire Purchase Accounts:

Default occurs when the hirer fails to make the agreed-upon installment payments according to the terms of the hire purchase agreement. Default can be due to various reasons, including financial difficulties or other unforeseen circumstances. In such cases, the hirer may not be able to continue with the scheduled payments. Default triggers specific actions and accounting treatments in the hire purchase agreement:

Accounting Treatment for Default:
When the hirer defaults on their installment payments, the accounting treatment varies based on the terms and conditions specified in the hire purchase agreement. There are three main scenarios:

a. Surrender of the Asset:
In some hire purchase agreements, if the hirer defaults on payments, they may have the option to surrender the asset voluntarily to the hire vendor. In this case, the accounting treatment involves:

1. Recording Default: The hirer recognizes the default by debiting the asset account (representing the asset under hire purchase) and crediting the hire vendor's account or a provision for hire purchase default account. This indicates that the hirer is no longer responsible for the future installment payments.

2. Adjusting Interest and Principal: The hire vendor adjusts the interest and principal portion of the payments ______ ______ ________ __________ _________ __________ ___ _____.
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