Hire Purchase Default: Computing Loss on Repossession and Testing the Buyer's Claim
On 1 April 2023 Meera Enterprises sold a machine to Anand on hire purchase. Cash price ₹8,00,000; down payment ₹1,00,000; three annual instalments on 31 March, the first two fixed at ₹3,00,000 each and the third to be the balance including interest. Interest is 10% p.a. on the outstanding cash price. Anand paid the down payment and the first two instalments but defaulted on the third. On 1 April 2025 Meera repossessed the machine, spent ₹12,000 on repairs and sold it for ₹1,90,000. Anand had charged depreciation at 15% p.a. on the written-down value in his books and now claims that he should be treated as an ordinary credit buyer who financed the purchase with a loan, so that the machine and the unpaid balance should be settled at book values and he should receive the excess of sale proceeds over the outstanding balance. Meera's accountant is unsure whether to compute a profit or loss on repossession and whether Anand's claim has merit.
1. Compute the outstanding cash price and the unexpired interest at the date of repossession.
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Interest is computed on the outstanding cash price at the start of each year.
| Year | Opening cash price outstanding | Interest @10% | Instalment | Principal repaid | Closing balance |
|---|---|---|---|---|---|
| 0 | 8,00,000 | - | 1,00,000 (down) | 1,00,000 | 7,00,000 |
| 1 | 7,00,000 | 70,000 | 3,00,000 | 2,30,000 | 4,70,000 |
| 2 | 4,70,000 | 47,000 | 3,00,000 | 2,53,000 | 2,17,000 |
| 3 | 2,17,000 | 21,700 | 2,38,700 | 2,17,000 | Nil |
At repossession (1 April 2025, after two instalments):
- Outstanding cash price = ₹2,17,000
- Unexpired interest = ₹21,700 (the interest embedded in the unpaid third instalment)
The third instalment would have been ₹2,38,700. Total interest over the contract is ₹1,38,700 (70,000 + 47,000 + 21,700); interest already charged to Anand is ₹1,17,000, leaving ₹21,700 unearned at default.
2. Compute the profit or loss on repossession in Meera's books and state how the repair cost and unexpired interest are treated.
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Net realisable value of the repossessed machine. Sale proceeds ₹1,90,000 less repairs ₹12,000 = ₹1,78,000. The repairs are incurred by the owner to make the asset saleable and are therefore deducted from the realisation; they are not a receivable from Anand.
Loss on repossession.
| Item | ₹ |
|---|---|
| Net realisable value | 1,78,000 |
| Less: outstanding cash price | (2,17,000) |
| Loss on repossession | (39,000) |
The loss is recognised in the hire purchase trading account/profit or loss. The unexpired interest of ₹21,700 is not recognised as income: it was never earned, and the outstanding balance for repossession purposes is the cash price outstanding, not the hire purchase instalment. Comparing the sale proceeds with the instalment of ₹2,38,700 would wrongly produce a much larger apparent loss and would double-count unearned interest.
Meera should also review the overall contract result: cash already received is ₹7,00,000 (down payment plus two instalments), of which ₹5,83,000 is principal; adding the ₹1,78,000 realisation gives ₹7,61,000 against a cash price of ₹8,00,000, consistent with the ₹39,000 loss.
3. Evaluate Anand's claim to be treated as a credit buyer with a loan. Compute his book value and the loss he suffers on repossession.
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The claim has no merit. Under a hire purchase agreement, ownership remains with the vendor until the option to purchase is exercised on payment of the final instalment. Anand is a bailee with an option to purchase, not a borrower who owns the asset. He cannot require the transaction to be recharacterised after default, and he has no right to any surplus on resale; equally, he is not liable for the ₹39,000 deficiency unless the contract says so, because the vendor has retained ownership and taken back its own asset. The interest already charged (₹1,17,000) was the price of credit and is not refundable.
Anand's book value.
| Year | Opening | Depreciation @15% WDV | Closing |
|---|---|---|---|
| 1 | 8,00,000 | 1,20,000 | 6,80,000 |
| 2 | 6,80,000 | 1,02,000 | 5,78,000 |
Loss on repossession in Anand's books. Asset given up ₹5,78,000 less liability extinguished ₹2,17,000 = ₹3,61,000. This is the net carrying consequence of losing an asset whose book value exceeds the outstanding capital; it is not a claim against Meera.
Had Anand instead borrowed ₹7,00,000 and bought the machine outright, he would have owned it, borne the same depreciation, and on sale would have received the proceeds subject to repaying the loan. That is a different legal structure, and the parties did not choose it.