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Hire Purchase accounting question

Hire Purchase accounting question

A Motor Vehicle was purchased a year ago for £15K. £5K was paid as a part exchange for a seconfd hand car, £3K cash and £7K Hire Purchase (over three years). A year later, the vehicle is then disposed of again being exchanged for a car costing £19500. Assuming that depreciation was 25% for the year and part exchange was worth £8K. £3K of HP was left as a liability in the B/S. Could someone advise how I would deal with the outstanding Hire Purchase liability in the balance sheet? Everything other than the HP part would go to a disposals account. I am confused about what to do with the HP.

Sohaib Sandhu

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By admin
08th Jan 2002 19:38

HP liability
You need to ask yourself "what actually happened to that 3K liability afterwards?" Did the company simply keep up the repayments (possible), or settle it in cash (most likely), or did some other party settle it or take it on (not seen that one in a set of acc's before)? Assuming the balance sheet date is the date of disposal or shortly afterwards, you keep the HP balance in the b/sheet at that date, and it then gets repaid/settled up in the following a/c year, I suppose! But the magic thing to do here is (obviously) talk to the client and find out the details! Unless (as it looks like) I'm answering a study question....(You can always tell a study question: They're either oversimplistic or over-complex, portraying a very unlikely set of events in the real world, they don't help all that much in teaching you what to actually do when you're sitting at your desk at work preparing a REAL set of accounts, and you're supposed to answer them with pen and paper, instead of living in the 21st Century and tapping it into Excel!) Cheers!

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By admin
08th Jan 2002 21:30

Thanks Tom for your clear cut explanation.

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