QUESTION 6 (20 MARKS: 36 MINUTES)

On 1 January 2018, Artistic Bhd (AB) sold equipment to Gilmore Bhd (GB) under a hire- purchase agreement. The cost and selling price of the equipment were RM780,000 and RM900,000, respectively. The agreement required a deposit of RM100,000 and further instalments of RM10,000 each month for 8 years starting from 31 January 2018.

GB uses the gross method to account for the hire-purchase and the sum of years digit method to calculate the interest expenses. The equipment is estimated to have a useful life of 10 years and a residual value of RM50,000. On 3 June 2020, GB received a notice from AB to repossess the equipment due to its default payments in April and May. On 25 June 2020, GB decided to settle the contract and incurred the storage expense of RM5,000 and repossession expense of RM4,200. Both AB and GB close their account on 31 December each year. AB uses the sales method to account for hire purchase and recognises the gross profit based on the collection.

REQUIRED:

(Round all numbers to the nearest RM)

1. Determine the (i) hire-purchase price and (ii) total interest of the equipment for GB. Show your workings.

2. Calculate the amount to be paid by GB for the early settlement of the equipment and prepared the related journal entries.

3. Compute the amount of gross profit recognised on 31 December 2019. Prepare all relevant journal entries for AB on 31 December 2019 including the journal entries to close the accounts.

4. Gilmore Bhd seeks your advice on the difference(s) between the net method and gross method in accounting for the hire-purchase transactions. Briefly explain the difference(s) between the two methods.