HIRE PURCHASE FINANCE. Hire Purchase Finance - Meaning. Payment of Periodic instalments Immediate possession of goods by the buyer Ownership of goods with vendor until full and final payment Vendor’s right to repossess the goods in case of default by buyer
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- Down payment + service charges + PV of hire purchase payments (Kd) – PV of depreciation tax shield (Kc) – PV of net salvage value (Kc).
Cost of Leasing is
- Lease management fee + PV of lease payments (Kd) – PV of tax shield on lease payments (Kc) + PV of interest tax shield on hire purchase (Kc)
Ownership lies with vendor(lessor)
Lessor(vendor) is entitled to claim depreciation tax shield
Ownership transferred to the hirer on the payment of last instalment.
The hirer is entitled to claim depreciation tax shieldLease financing Vs Hire purchase Financing
Capitalization of the asset is done in the books of the leasing co.
the entire lease payment is eligible for tax computation in the books of the lessee.
Leasing used as a source of financing for high cost assets like ships, machinery, airplanes etc
Capitalization of the asset is done in the books of the hirer.
Only the hire -interest is eligible for the tax computation in books of hirer..
HP use as a source of finance for low cost assets as automobiles, office equipments etc.Lease financing Vs Hire purchase Financing….
No Down payment required for using leased assets.
In Lessee’s books, leased assets shown as a note only.
Not suitable for low capital enterprises , who desire to show strong asset position
Down payment is required to be made for acquiring the asset, and margin of 20-25% maintained.
In hirer’s books ,HP assets shown as an asset, and instalments payable as a liability.
HP suitable for low capital enterprises , which need to show strong asset position.Lease financing Vs Hire purchase Financing….
An asset given on lease, is fixed asset for lessor.
All receipts from lease, is shown in P&L, the Lessor’s books.
The hire vendor will show the HP asset, as stock in trade, or as receivables.
Only the interest portion, from instalments is taken to the hire vendor’s Profit & loss Account.Lease financing Vs Hire purchase Financing….