Page 251 - Accountancy_F5

*This is the balance figure at the end of the HP agreement period. It is obtained by taking
Total HP interest minus HP interests already paid.

Sum of the years digit method
When using the sum of the years digit method, the hire purchase interest is apportioned
according to the digits assigned. Usually, the digits are assigned in a descending order.
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The highest digit is assigned to the first instalment and digit 1 to the last instalment. This
method results to charging more interest in earlier periods compared to later periods.
The logic behind is that the acquired asset is assumed to be more productive in early
years. The interest proportion to each accounting period is then calculated as follows:
LANGUAGE EDITING
Digit given to instalment
Interest proportion = = Total Interest
Sum of digits
Sum of digits can be obtained using the following formula:

1
nn + h
^
Sum of digits =
2
Note that, ‘n’ is the number of years.
Example 8.3 provides relevant data that illustrates the use of the ‘sum of the years’ digit
method for allocating interest in a hire purchase agreement.
Example 8.3
On 1 January 2022 Mkwajuni Pty acquired computers from Okoa Ltd. on hire
st
purchase agreement under the following terms:

Details TZS

Cash price 12,400,000
Down payment 6,000,000
Hire price 13,020,000

Number of annual instalments is four (4)
Required:
Calculate the hire purchase interest per instalment under each of the following
situations:
(a) If the first instalment is due at the end of 2022; and
(b) If the first instalment is due at the date of sale.

Student’s Book Form Five
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ACCOUNTANCY_DUMMY_23 JUNE.indd 238 23/06/2024 17:36