Share this:
(iv) Insurance Policy method:-
Instead of investing the sum in securities, the same is paid by way of an Insurance premium to an Insurance company which issues an endorsement policy of the amount equal to the sum payable on redemption and maturing on the date when the debentures become repayable.
The premium paid annually is debited to the debenture redemption fund policy A/c and credited to the cash / Bank A/c, and the premium is paid at the beginning of a period.
The same amount will be set aside out of profit & loss appropriation A/c through debiting profit and loss appropriation A/c and crediting debenture redemption fund A/c.
On the maturity of the policy:-
Dr. Cash / Bank A/c
Cr. Debenture Redemption fund policy A/c ) with sum received on the maturity of the policy and any balance on the Insurance policy A/c shall be taken to the debenture Redemption fund (Deb. Red. Reserve) A/c
If a Cr. Balance – Dr. Deb. Fund policy A/c
Cr. Deb. Red. Fund A/c
If a De. Balance – Dr. Deb. Red. Fund A/c
Cr. Deb. Fund policy A/c
On the redemption of the debentures:-
Dr. Redeemable Debenture A/c / Debenture Redemption
Cr. Cash / Bank A/c
The credit balance on the deb. Redemption Fund A/c shall be transferred to a Reserve A/c.
Entry: Dr. Deb. Redemption Fund A/c
Cr. Reserve A/c
Example:-
A company has a debenture on issue of Tshs. 150,000 on 1st Jan. 1990. It decided to provide for the redemption of the debentures for Tshs. 1,500,000 for 3 years. The annual premium is Tshs. 47,500. Show the necessary ledger accounts to record the above using the Insurance policy method.
DR REDEEMABLE DEBENTURE CR
31.12.90 | Balance c/d | 150,000 | 1.1.90 | cash | 150,000 |
150,000 | 150,000 | ||||
31.12.91 | Blance c/d | 150,000 | 1.1.91 | Balance b/d | 150,000 |
150,000 | 150,000 | ||||
31.12.92 | Deb.red. | 150,000 | 1.1.92 | Balance b/d | 150,000 |
150,000 | 150,000 | ||||
DR DEBENTURE RED.FUND INSURANCE POLICY ACCOUNT CR
1.1.90 | cash(in.prem) | 47500 | 31.12.90 | Balance c/d | 47500 |
47,500 | 47,500 | ||||
1.1.91 | Balance b/d | 47500 | 31.12.91 | Balance c/d | 95,000 |
cash(in.prem.) | 47500 | ||||
95,000 | 95,000 | ||||
1.1.92 | Balance b/d | 95000 | 31.12.92 | cash | 150,000 |
1.1.92 | cash(in.prem.) | 47500 | |||
Deb.Red.fund | 7500 | ||||
150,000 | 150,000 | ||||
DR DEBENTURE REDEMPTION FUND ACCOUNT CR
31.12.90 | Balance c/d | 47,500 | 31.12.90 | P & L | 47500 |
47,500 | 47,500 | ||||
31.12.91 | Balance c/d | 95,000 | 1.1.91 | Balance b/d | 47500 |
P & L Appr. | 47500 | ||||
95000 | 95000 | ||||
1.1.92 | Balance b/d | 95000 | |||
31.12.92 | Deb.redemption | 150,000 | 31.12.92 | P & L Appr. | 47500 |
31.12.92 | Deb.red.fund policy | 7500 | |||
150,000 | |||||
DR DEBENTURE REDEMPTION ACCOUNT CR
cash | 150,000 | 31.12.92 | Redeemable Deb. | 150,000 | |
150,000 | 150,000 | ||||
EXERCISE
1. A Ltd company issued Debentures of Tshs. 600,000 on 1st Jan. 1992 and decided to provide for the redemption by means of an Insurance policy for Tshs. 600,000. The annual premium was Tshs. 190000. Prepare the necessary ledger accounts assuming that the amount of policy was dully released and debentures were paid.
2. The following balances appeared in the books of a limited company on 31st Dec. 1997:-
Dr. Cr.
6% Debentures. Tshs. 500,000
Debentures redemption Insurance policy. Tshs. 460’000
Debenture redemption fund Tshs. 460’000
The policy amount was Tshs. 500,000 and the annual premium were received, and the debentures were redeemed.
-You are required to prepare the necessary ledger accounts in the books of the company.
OUT OF CAPITAL METHOD:-
Example:-
A Ltd co. had a debenture on issue of Tshs. 15000 on 1st Jan. 1990 at a discount of 5%, repayable at par by annual drawings of Tshs. 3000 for five years. Show the necessary ledger accounts for the first year to record the above.
Solution:-
Discount on debenture = 5/100 x 15000 = 750.
DR CASH ACCOUNT CR
Deb.Appl.&Allot | 14250 | Deb.,redemption | 3000 | ||
DR DEB.APPLICATION & ALLOTMENT CR
Redeem Deb. | 15,000 | Bank | 14250 | ||
Disc on issue | 750 | ||||
15,000 | 15,000 | ||||
DR REDEEMABLE DEBENTURES ACCOUNT CR
1st year | Deb.Redemption | 3000 | 15,000 | ||
31.12.90 | Bal.c/d | 12,000 | |||
15,000 | 15,000 | ||||
Balance b/d | 12,000 |
DR DISCOUNT ON ISSUE DEBENTURE ACCOUNT CR
Deb.Appl.&Allot | 750 | 31.12.90 | P & L | 250 | |
Bal. c/d | 500 | ||||
750 | 750 | ||||
DR DEBENTURE REDEMPTION ACCOUNT CR
311.2.91 | cash | 3000 | Reedemable Deb. | 3000 | |
3000 | |||||
Discount on deb. Written off = 5/15 x 750 = 250.
COMPANY FINAL ACCOUNTS
They consist of the trading A/c and Profit and Loss A/c. The trading and profit and loss A/c of a company are similar to those of a sole proprietorship, except that in the profit and loss A/c of the company, the following items can be seen to have been debited to it, there are:-
(a) Debenture Interest
(b) Directors salaries or fees or emoluments
(c) Audit fees or charges
And to the credit side there can be shown a part from the gross profit made other gains such as Dividends received.
In this section / A/c the distribution of profit is shown. It is in this A/c that appropriation items such as corporation tax payable, proposed dividend interim dividend, reserve transfer etc are listed.
Corporation tax:-
It is a tax levied on a company’s profit.
Dividend:-
The term dividend originates form a Latin word “Dividend” meaning to dividend. It is that part of the profit of a company which is distributed among its share holders.
TYPES OF DIVIDEND:-
(a) Interim Dividend
(b) Proposed Dividend
(a) INTERIM DIVIDEND
The word “Interim” originates from Latin meaning “in the meantime”
It is a dividend which is declared before the close of the company’s financial period.
(b) PROPOSED DIVIDEND:-
This is only provided for and so not paid before the accounts are closed.It’s shown itself among items on the Balance sheet as “proposed dividend or unpaid dividend”
To the credit side of the appropriation A/c is included such items as the Net profit made during the year and bala
nce of profit it from the previous year.
nce of profit it from the previous year.
DR APPROPRIATION ACCOUNT FOR THE YEAR ENDED 31STDEC1999 CR
Dividends, interim | xx | Balance b/d | xxx |
proposed | xx | Net profit made during the year | xxx |
written off expenses | xx | ||
corporation tax payable | xx | ||
Transfer to reserve e.g CRR | xx | ||
Bal. c/f (retained earnings | |||
unappropriated balance) | xx | ||
xxxx | xxxx | ||
Sales | xxxx | |
less; Return inwards | xxx | |
xxxx | ||
Deduct; cost of goods sold opening stock | xxx | |
Add; purchases xxx | ||
carriage inwards xx | ||
less; Return outwards xxx | xxx | |
Net purchases | xxx | |
less; closing stock | xxx | xxx |
Gross profit | xxxx | |
Add other gains e.g. dividend/interest received | xxx | |
xxxx | ||
Deduct Directors salaries xx | ||
Debenture interest xx | ||
Stationery xx | ||
Audit fees xx | xxx | |
Net profit made during the year before tax | xxxx | |
Deduct corporation tax | xx | |
Net profit after tax | xxx | |
Add Net profit b/f (previous year) | xx | |
xxx | ||
Deducts dividend interim xx | ||
proposed xx | ||
Transfer to general reserve x | xxx | |
Balance c/f Retained earnings/un appropriated balance | xxx | |
BALANCE SHEET AS AT 31/12/1999
Fixed Assets | cost | Depreciation | Net |
Premises | xxx | – | xxx |
Furniture & fittings | xx | x | xx |
Machinery | xx | x | xx |
Motor vehicle | xx | x | xx |
xxx | xx | xxx | |
Deduct; Net current Assets | |||
or Working capital | |||
Current Assets | |||
stock | xxx | ||
Debtors xx | |||
less; provision x | xx | ||
cash | x | ||
xxx | |||
less; current liabilities | |||
sundry creditors xx | |||
proposed dividend xx | |||
corporate tax payable xx | xx | xx | |
Net assets | xxx | ||
Financed by; | |||
Authorized share capital | |||
ordinary shares of each /= | xxx | ||
Issued & paid up capital | |||
ordinary shares of /= each | xxx | ||
Reserves & surplus | |||
P & L balance (retained earnings) | xxx | ||
share premium | xx | ||
ordinary share holder fund/Equity | xxx | ||
Add; % Debentures | xx | ||
capital employed | xxx | ||
EXERCISE:-
Here is a trial balance of RF Ltd as at 31st June 2008.
DEBIT | CREDIT | |
share capital – authorized & issued | 50,000 | |
stock as at 30th June 2007 | 38,295 | |
Debtors | 26890 | |
creditors | 12310 | |
10% Debentures | 20,000 | |
Fixed replacement reserve | 10,000 | |
General reserve | 6000 | |
P & L A/c as at 30th June 2007 | 3964 | |
Debenture interest | 1000 | |
equipment at cost | 35,000 | |
Motor vehicle at cost | 28500 | |
Bank | 3643 | |
cash | 180 | |
sales | 99500 | |
purchases | 66,350 | |
Returns Inwards | 1150 | |
carriage inwards | 240 | |
wages and salaries | 10360 | |
Rent, Rates and insurance | 5170 | |
Discount allowed | 1246 | |
Directors remuneration | 2500 | |
provision for depr.at 30th june2007 | ||
equipment at cost | 8400 | |
Motors | 10350 | |
220,524 | ||
Given the following information as at 30th June 2008, drawn up a set of financial statements for the year to that date.
(i) Stock 30th June 2008 Tshs. 4937.
(ii) The share capital consisted of 25000 ordinary shares of sh. Each and 25000 10 per cent preference shares was proposed to be paid as well as a dividend of 20 per cent on the ordinary shares.
(iii) Accrued rent Tshs. 700. Directors remuneration Tshs. 2500.
(iv) Debentures interest ½ years interest owing.
(v) Depreciation cost equipment 10 percent reserve, motors 20%.
(vi) Transfers to Reserve; General reserve Tshs. 2000. Fixed assets replacement reserve Tshs. 1,000.
(vii) Provide 50% as corporation tax payable.
PROFIT &TRADING & LOSS APPROPRIATION ACCOUNT & B/SHEET.
Sales | 99500 | |
less; Returns inwards | 1150 | |
Net sales | 98350 | |
Deduct; cost of goods sold | ||
opening stock | 38295 | |
Add; purchases | 66350 | |
104,885 | ||
less; closing stock | 49,371 | 55,514 |
Deduct; wages and salaries 10360 | ||
Rent ( 5170 + 700) | 5870 | |
Debenture interest | 1000 | |
Debenture owing | 1000 | |
Discount allowed | 1246 | |
Directors remuneration | 5000 | |
Depr; Equipment(10/100 x 35000) | 3500 | |
Motors(20/100 x 28500) | 5700 | 33676 |
Net profit made before tax | 9160 | |
Deduct;corporation tax(50% x 9160) | 4580 | |
Net profit after tax | 4580 | |
Add; Net profit b/f(previous yr) | 3964 | |
8544 | ||
Deduct; dividend interim | 2500 | |
proposed (20/100 x 2500) | 5000 | |
Transfer to reserve(1000+2000) | 3000 | 10500 |
1956 | ||
BALANCE SHEET AS AT30TH JUNE 2008
Fixed Assets | cost | Depreciation. | Net |
Equipment | 35,000 | (8400+3500) | 23100 |
28500 | (10350+5700) | 12450 | |
63,500 | 27,750 | 35,550 | |
Deduct; Net current Assets | |||
Current Assets | |||
stock 49371 | |||
Debtors 26890 | |||
Bank 3643 | |||
cash 180 | |||
80,084 | |||
less; current liabilities | |||
sundry creditors 12310 | |||
proposed dividend 2500 | |||
Corporate tax payable 4580 | 19390 | 60694 | |
-25144 | |||
Financed by; | |||
Authorized share capital | |||
(50,000 – 25,000) ord.share of 1@ | 25,000 | ||
Reserve & surplus | |||
P & L Balance | 1956 | ||
Add; 10% Debenture | 20,000 | ||
Capital employed | 21,956 | ||
HIRE PURCHASE ACCOUNTING
HIRE PURCHASE TRANSACTIONS.
As a system of trading, hire purchase is governed by the hire purchase act. Under this system the buyer agrees to pay for the goods by installments.
The property in goods remains with the seller and the buyer pays hire charges over a stipulated period of time at the end of which the pays a further amount called an option to purchase/ option fee which then gives him ownership. The buyer obtains possession for the goods and uses them, but ownership for the goods will pass from the seller to the buyer when the latter pays the final installment. If the buyer he fails to pay any installment, then seller will be entitled to take back the goods (repossess) and the buyer shall have no any claim over the installment he already paid.
ACCOUNTING PART
- Buyers books.
- Sellers books.
Hire- purchase transactions in the buyers books
Goods which are dealt with are usually fixed assets such as motorcars, refrigerators and etc.
The hire purchase price actually it consists of two elements:-
- Cash “cost” price and
- Hire purchase interest.
This acts as compensation to the seller for delay in receiving a full payment at once and also for covering up some attendant risks.
N.B
It is a normal accounting policy to treat hire purchase transactions as actual sales or purchase, because the intentions of the buyer 1st pay the whole amount through installments.
Methods of writing off the title purchase interest.
- Straight line / fixed installment methods.
- Sum of the digits method (or rule of 78 methods).
- Actuarial method.
This interest should be written off to P & L A/C over the period of the hire purchase contract.
- Straight line method
Under this method, the hire purchase interest written off on the straight line basis. Therefore the hire purchase interest per installment due = (Total hire purchase /Interest)/(Total number of interest).
- Some of the years’ digits method
This is an arithmetical method of apportioning the hire purchase interest in approximate proportion to the amount outstanding at any time.
Procedure
- Number the installments e.g. 3 installments
1
2
3
- Assign the highest digit to the first installment and digit one to the last installment
Installment digits
1 3
2 2
3 1
- Sum up the digits 6
- Apportion the H.P. interest e.g I H.P interest = Tshs 36000
- Apportion the H.P. interest e.g I H.P interest = Tshs 36000
1st Year hire purchase interest =3/6 x 36000
= 18000
2nd year hire purchase interest = 2/6 x 36000
= 12000
3rd year hire purchase interest = 1/6 x 36000
- =6000
Buyer’s books continue
- Actuarial method
This is method of the writing off the hire purchase interest based on the reducing balance phenomenon.
This method can be used in the presence of the following items:-
Cash price, deposit, (not necessary) rate of interest, number of installments together with their respective amounts.
Working:-
cash price | xxx |
less; Deposit | xx |
Balance subject to H.P Interest | xxx |
Add; Hire purchase interest;1st yr | xx |
xxx | |
Deduct; 1st yr installment paid | xxx |
Balance subject to H.P Interest | xxx |
Add; hire purchase interest;2nd yr | xx |
xxx | |
Deduct; 2nd yr installment paid | xxx |
Balance subject to H.P Interest | xx |
Add; hire purchase inter.3rd yr | xx |
xx | |
Deduct; 3rd and final instal. Paid | xx |
NIL | |
METHOD OF RECORDING.
There are two alternative methods of recording.
Method A
Accounting entries:
With the cash “cost price
With the proportion of the H.P interest when Installment is due
With the deposit + installment paidN.B
Balance on the vendor A/C represents the unpaid portion of the cash price, which should be included under current liabilities in the B/S.
METHOD B
1. Dr. Fixed assets A/C with the cash price
Dr H.P interest suspense A/C with the total H.P interest
Cr, vendors A/C with total H.P price.
1. Dr. Fixed assets A/C with the cash price
Dr H.P interest suspense A/C with the total H.P interest
Cr, vendors A/C with total H.P price.
with the proportion of the H.P interest installment is due
with the deposit + installment paidN.B
The balance on the vendor A/C less the balance of hires purchase interest suspense A/ shall be included current liabilities in the balance sheet.
Example
On 1st Jan 1991, contractor’s ltd bought a hydraulic crane from Hi – lift ltd on hire purchase. The terms o f H.P contract were initial deposit of Tshs 40000 was payable followed by 3 installments of Tshs 37978 on 1st Dec in each of the next three years from 1991 onwards. The cost of the crane for cash purchase would have Tshs. 120,000. Interest is charged on the balance out standing 31st Dec at the rate of 20% p.a. the final year of both company’s end 31st Dec.
Required
- What was amount of H.P. Interest included in the H.P price?
- What amount of interest could allocated in each of three years if the sum of digits method were used.
- Prepare the relevant ledger a/c contraction ltd ledger for each of the three year ended 31st Dec 1991, 1992, 1993 base on the assumption that contractors ltd charges depreciation on his fixed assets. Using a straight line method in addition 20% p.a interest rate is in uses.
Solution
cash price | 120,000 |
less; Deposit | 40,000 |
Balance subject to H.P Interest | 80,000 |
Add; H.p 1st yr 20/100 x 80,000 | 16,000 |
96,000 | |
Deduct; 1st yr installment paid | 37978 |
Balance subject to H.P Interest | 58022 |
Add; 2nd yr H.P interest 20/100 x 58022 | |
69626 | |
Deduct; 2nd yr installment paid | 37978 |
Balance subject to H.P Interest | 31648 |
Add; hire purchase inter.3rd yr 20/100 x 31648 | 6330 |
37978 | |
Deduct; 3rd and final instal. Paid | -37978 |
NIL | |
a) Hire purchase = Total H.P price – cash price
= Deposit + 3 installments – cash price
= (40000 + 3 x 37978) – 120,000
= Tshs.33934
- Calculate of the H.P. interest by the sum of the digit method.
Proportion of the H.P interest
1st year; 3/6 x 33934 = 16967
2nd year; 2/6 x 33934 = 11311
3rd year; 1/6 x 33934 = 5656
DR HI- LIFT COMPANY ACCOUNT CR
1/1/1991 | 120,000 | 31.12.1991 | Bal. c/d | 120,000 | |
120,000 | 120,000 | ||||
1/1/1992 | Bal. b/d | 120,000 | 31.12.1992 | Bal. c/d | 120,000 |
120,000 | 120,000 | ||||
1/1/1993 | Bal. b/d | 120,000 | 31.12.1993 | Bal. c/d | 120,000 |
120,000 | 120,000 | ||||
1/1/1994 | Bal. b/d | 120,000 | |||
