HP contract early settlement, revaluation, equity

HP contract early settlement, revaluation , equity in assets, double entry

Didn't find your answer?

Hello, I need some help with below case scenario. Despite of my experience, this is first time when I came across of such situation. 

Transport company ,  client wants to buy Eco batteries on HP contract  but HP company says they cant sell this product separately and batteries has to be included with trailers for which there is already HP contract in place.

Current HP contract trailers :total  left to pay £69469.30 , interest left to pay £15031.98

Trailers  - original cost £120950, acc depreciation £42840.02

client received :

Settlement letters for £66463.11

Purchase invoice from Eco batteries supplier £97800 plus VAT £19560

Valuation of trailers – new value - £71380 – less than my calculations although some assets value is higher and some less giving this average.

HP company instructed my client to issue Sale invoice to financial company who deal with HP company, this is for both revaluated trailers and new eco batteries. Total £169180 plus VAT 33836 less deposit 14276 ( VAT element of trailers after valuation ). At the bottom of the invoice there is note please settle this balance with : settlement amounts from old contract, purchase invoice on eco batteries and Equity in trailers. £4916.89 (difference between settlement amounts and new valuation of trailers )

I cant figure out how to put all element together especially equity and settlement amounts considering everything cross each other.

At the end, client has ot new contract both for eco batteries and trailers £169180 vat £33836 financial charge 55000 and deposit of £24056. And once again .. deposit is funded by: deposit from sale to financial company £14276, equity in trailers and rest is paid from cients bank.

 

I was reading and I am not certain about some journals. Also, is the sale a REPO? Business claimed capital allowances already and I ma not sure if that affect it in any way ?.

 

Thank you 

Replies (3)

Please login or register to join the discussion.

avatar
By paul.benny
09th Feb 2024 09:04

I think perhaps you're becoming confused by there being a sale and repurchase of the same trailers.

Set out the journals for each step on the basis that the trailers in the new agreements are different from the original trailers and see if that makes more sense.

Capital allowances are a separate discussion but may be easier to consider once you have your head round the accounting.

Thanks (1)
avatar
By kamila123
09th Feb 2024 10:16

Thank you for replay.
I created journals step by step
The balance due on old HP contract which is 69469.30 is settled with £66463.11. I presume I could create dummy bank acc for CR £66463.11. There is still interest due on old HP for £15031.98 which i believe I cant write down to expense account as that would be incorrect. However, because settlement amount is less than balance due on HP I cant figure out what to do with it. My first step would be to "settle "old contract but that creates differences. I can see that if I DR 66463.11 on HP account and CR with £71380 ( new value of trucks under new contract ) that would give me equity of £4916.89 which I can transfer to dummy bank and use to settle balance from "sale". However as mentioned above how can I process with old HP ?I think this is the missing piece as all other entries are straight forward.

Thanks (0)
Replying to kamila123:
avatar
By paul.benny
09th Feb 2024 10:28

I think the £15k interest you mention is interest that would have been payable in the future, so no entries needed.

In theory, the settlement amount should match your balance owing. The difference is likely to be because the finance company has calculated interest slightly differently to you. I'd take the £3k as miscellaneous income.

Having bought the trailer, the gain on resale to finance company is simply profit on disposal of fixed assets.

Thanks (0)