BANKING GENERAL KNOWLEDGE
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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The interest charged in that period only should be included
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Interest should be apportioned in proportion to the repayment totals
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The total interest levied should be divided equally over the total period the for purchase agreement
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Interest should instead be capitalised on the balance sheet
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Detailed explanation-1: -The profit on interest charged on the hire purchase should appear in the profit and loss account. when the interest charged in that period only should be included.
Detailed explanation-2: -Interest is charged on the amount outstanding. Therefore, if the hire purchaser makes a down payment on signing the contract, it will not include any amount of interest. It should be noted that though the instalments of a hire purchase agreement may be equal, the interest element in each instalment is not the same.
Detailed explanation-3: -Where the rate of interest is not given and only the cash price and the total payments under hire purchase installments are given, then the total interest paid is the difference between the cash price of the asset and the total amount paid as per the agreement.
Detailed explanation-4: -Hire purchase is an arrangement for buying expensive consumer goods, where the buyer makes an initial down payment and pays the balance plus interest in installments.
Detailed explanation-5: -Hire-purchase transactions originated in England during the mid-19th century when, against the backdrop of the Industrial Revolution, sewing machines were sold under a formal agreement to hire with an option to purchase. Subsequently, other consumer durable goods began to come under the purview of such agreements.