QUESTION 2

On 1 September 2017, Seven Food Bhd purchased a packaging machine under hire purchase agreement with Tujuh Todak Bhd. The cash price of the machine was RM104,800 and the interest charged was 7% per annum.

Seven Food Bhd paid 30% of the cash price as a deposit. The hire purchase period was 24 months and the instalments are paid at the end of each month starting 30 September 2017. The economic life of the machine was 7 years and Seven Food Bhd used straight line method to depreciate the machine. Seven Food Bhd and Tujuh Todak Bhd close their accounts on 31 December every year. Seven Food Bhd used gross method to account for the hire purchase and employed sum-of-the-years digits method to recognise the interest expense on the instalment payment date.

In April 2018, Seven Food Bhd faced financial difficulties in settling their debts. The company was unable to pay the hire purchase instalments for April and May 2018. After serving "the notice of intention to repossess" to Seven Food Bhd, Tujuh Todak Bhd repossessed the machine on 1 July 2018 with a cost of RM600. The market price of the machine at the repossession date was RM49,080 and the selling cost was RM250.

REQUIRED:

(a)Calculate the amount of the hire purchase price and the monthly instalment for Seven Food Bhd.

(b)Prepare the related journal entries for Seven Food Bhd on 1 September 2017 and 31 December 2017.

(c)Calculate the amount to be paid to or received from Tujuh Todak Bhd on the repossession date and prepare the related journal entries.

(d)Discuss TWO (2) differences between hire purchase transactions and credit sales in terms of criteria such as ownership and returning of goods.