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(3) Rapid Transit Ltd. purchased spare parts from Good Cars Ltd. on 1 January 2020.
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Cash price was TZS 4,000,000. Hire purchase price was TZS 4,600,000 payable
into two annual instalments of TZS 2,304,000 at the end of each year. If the hire
purchase interest rate is 10 per cent per annum.

Required: Calculate interest chargeable at the end of each accounting period.
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Calculation of cash price
In a situation where the cash price is not known, it becomes challenging to record the
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accounting transactions in the buyer’s books, as the purchased asset is recorded using the
cash price. Therefore, the cash price should be determined using the following alternative
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methods: (i) By using an annuity table, and (ii) Without using an annuity table.

Calculation of cash price using an annuity table
The use of annuity table simplifies the calculation of interest amount to be included in
each instalment. In the annuity table, the rate of interest is given in the rows and the years
in the columns. When using the annuity table, the first step is to calculate the present
value of each instalment. Then, the down payment is added to the summation of the
present values to obtain cash price. The procedure is as follows:
(i) Observe the given rate of interest in the row and the year in the column to find out
the corresponding figure to the given interest and year.
(ii) The obtained figure represents a present value of each 1 unit of currency.
(iii) Multiply the present value with the amount of the instalment to obtain the present
value of the instalment. This is the amount of cash price included in the instalment.
(iv) Calculate the present values of all other instalments in same manner.
(v) Add the present values of all instalments to the down payment if any, the resulting
figure will be the total cash price.

The following example 8.4 provides relevant data to illustrates the computation of
the cash price.

Example 8.4
Mwinyi Enterprises Ltd. is a business firm dealing with manufacturing of home
furniture using steely pipes and bars. On 1 July 2021, the firm purchased a welding
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machine on hire purchase system, to assist in the manufacturing process. The hire
purchase price was TZS 3,750,000, payable as follows:

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