Category Archives: LEASING AND HIRE PURCHASE

Net Present Value of Hire Purchase Plan [NPV (HPP)] The NPV (HPP) consists of: 1. Present value of hire purchase installments 2. Plus: Documentation and service fee 3. Plus: Present value of tax shield on initial direct cost 4. Minus: Loan amount 5. Minus: Initial cost 6. Minus: Present value of interest tax on the finance income 7. Minus: Present value of income tax on finance income (interest) netted for interest

From the Viewpoint of Finance Company (Hire Vendor) Hire purchase and leasing represents two alternative investment decisions of a finance company financial intermediary hire vendor. The decision criterion, therefore, is based on a comparison of the net present values of the two alternatives, namely, hire purchase and lease financing. The alternative with a higher net present value would be selected and the alt

Decision Criterion The decision criterion from the point of view of a hirer is the cost of hire purchase vis-a-vis the cost of leasing. If the cost of hire purchase is less than the cost of leasing, the hirer (purchaser) should prefer the hire purchase alternative and vice versa. Cost of Hire Purchase The cost of hire-purchase to the hirer (CHP) consists of the following: 1. Down payment 2. Plus: Service charges 3

Financial Evaluation The framework of financial evaluation of a hire purchase deal vis-a-vis a finance lease, discussed below, covers both the hire as well the finance company's viewpoint. From the Point of View of the Hirer (Hire Purchaser) The tax treatment given to hire purchase is exactly the opposite of that given to lease financing. It may be recalled that in leasing financing, the lessor is entitled to cl

In the Books of Hire Vendor (Finance Company) At the inception of the transactions, the finance company should record the hire purchase installments receivables as a current asset (i.e., stock on hire) arid the (unearned) finance income component of these installments as a current liability, under the head unmatched finance charges. At the end of each accounting period, an appropriate part of the matured financ

In the Books of Hirer The cash purchase price of the asset is capitalized and the capital of the hire purchase installment, that is, the cash purchase price less down payment, if any, recorded as a liability. Depreciation is based on the cash purchase price of the asset infinity with the policy regarding similar owned assets. The total charge for credit matured  charge at the inception of the hire purchase tra

Accounting and Reporting Hire purchase, as a form of financing, differs from lease financing in one basic respect, while in a purchase transaction, the hire has the option to purchase the asset at the end of the period, on payment of the last installment of hire charge, the lessee does not have the option to acquire ownership of the leased asset. A hire purchase transaction has, therefore. some typical featuresÂ

Rate of Tax The rates of tax on hire purchase deals vary from state to state. There is, as a matter of fact, no uniformity even regarding the goods to be taxed. If the rates undergo a change during the currency of a hire purchase agreement, the rate in force on the date of delivery of the goods to the hire is applicable. Interest Tax The hire purchase finance companies, like other credit finance companies, have

States Entitled to Impose Tax When a hire purchase transaction is entered in the state where the goods are lying, the concerned state is entitled to impose sales tax. In cases where the contract of hire purchase is made into one state and the goods are in another state, the entitlement to tax vests with the state in which the goods are delivered by the hire vendor to the hire, even though the goods may be trans

Taxable Quantum The quantum of sales tax is related to the sales price; it must be determined to be the consideration for the transfer of the goods when the delivery of the goods takes place. The consideration for the sale of the goods is the total amount that is agreed to be paid before the transfer of the goods takes place in a hire purchase contract. In other words, sales tax is levied on the entire amount p