Star Bhd is a leader in the marketing of premium heavy equipment in Malaysia and Brunei. The  company offers full range of construction equipment and earth moving machinery such as  backhoe loaders, dozers, wheel excavators and many more. On 5 October 2020, Earth Bhd purchased a wheel loader under hire purchase agreement from  Star Bhd. The cash price of the loader was RM245,500 and the interest charged was 8% per  annum. Earth Bhd paid 20% of the cash price as a deposit. The hire purchase period was 36  months and the instalments are paid at the end of each month starting from 31 October 2020.  The depreciation charge is 10% per year.  

Both companies close their accounts on 31 December every year. Earth Bhd uses gross method  to account for the hire purchase and employs sum-of-the-years digits (SYD) method to  recognise the interest expense on the instalment payment date. In May 2021, Earth Bhd faced financial distress to pay the installment because many  construction projects have been postponed due to Movement Control Order (MCO). 

The company was unable to pay the hire purchase instalments for May and June 2021. After sending  "the notice of intention to repossess" to Earth Bhd, Star Bhd repossessed the machine on 3  August 2021 by incurring the repossession cost of RM1,500. The market price of the machine  at the repossession date was RM75,000 and the selling cost was RM550.

REQUIRED:
(a) Calculate the hire purchase price and the monthly instalment for Earth Bhd. 

(b) Prepare the related journal entries for Earth Bhd on 5 October 2020 and 31 December  2020. 

c) Prepare all related journal entries for Earth Bhd on the date of repossession.

Answer rating: 100% (QA)

a Calculation of Hire Purchase Price and Monthly InstalmentCash price of the wheel loader RM245500De... View the full answer