Hire Purchase & Borrowing Cost Concept

Hire Purchase

Meaning of Hire Purchase: Hire purchase is an arrangement for buying Capital Assets, where the buyer makes an initial down payment and pays the balance with interest in installments. Title of the Asset Transfer to Buyer on Payment of the last Instalment. 

In Simple Word: Taking Loan for Buying Capital Asset.

For Example Emil Purchase Car for Business purposes with Hire Purchase Loan

If Capital Assets are Purchased first you need to get Tax Invoice.

Now open Hire Purchase Reconciliation Excel Sheet

In that fill the following Details

Excel Formula 

=Rate (Period, -Payment Per Period, Amount Borrowed) *12 Months

Excel Formula Application

=Rate (60, -1035.71,73689) *12

In Worksheet, it will show the interest rate automatically 

Now Type that Interest Rate in Excel under Annual Interest Rate: 4.7457% 

Now in Excel schedule, it calculates and shows the result.

Explanation

Borrowing Cost

Borrowing Cost can’t able to claim as full Expenditure, it should be amortized.

Borrowing Cost of Loan write off Over the year of

‘Loan Repaid 

Or                                  Whichever is Earlier

5 Years’

How Borrowing cost will be calculated?

1. Borrowing cost $689

2. No of Days in FY 2022 From 02/03/2022 to 30/06/2022 🡺 120 Days.

3. No of Days Between 02/03/2022 to 30/06/2026 🡺 1580 Days

4. No of Days in a year 🡺 365 Days

Calculation

($689/1580 Days) X 120 Days = $52.32

($689/1580 Days) X 365 Days = $159.17

Balloon Payment Means

A Balloon Payment is when you agree to pay a one-time, lump-sum amount to your lending institution at the end of the loan's term. You will only pay interest and a fraction of the principal because you will be required to pay a lump amount at the conclusion of the loan.