Question

Explain the term ‘Default’ and ‘Repossession’ both in relation to ‘hire purchase transaction’ and ‘installment sale transaction’. Describe the difference between accounting treatment under hire purchase system and installment payment system.

Answer 1

In a hire purchase transaction, a default is when a buyer fails to pay the amount owed for a purchase, and a repossession is when the seller reclaims what was sold to the buyer because of the lack of payment and returns any payment already received. In an installment sale, a default is when a buyer fails to pay one installment of the multiple installments of payment he owes, and a repossession is when the seller reclaims what was sold due to lack of payment and terminates further payment installments. They differ in accounting treatment because a hire purchase transaction returns any payment already made, while an installment transaction ends the installments and retains payments already made.