HP Liability

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT student discussion
Please can someone help with a HP issue....I am incredibly stuck and have been looking at this for ages and I must have missed something

A company purchases a van for £8000+1400 VAT = £9400

The company then sells the van onto a HP lender, the invoice being

VAN £8000
VAT £1400
TOTAL £9400
less deposit -1400
BALANCE £8000

So the company owe money to the HP company for the van.

SO why is the HP liability only £8000, yet the van is in the asset register at £9400?

Please help!!

Comments

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:HP Liability

    I'll explain using the journal entries, which should help you.

    The deposit would be:

    Credit cash £1,400
    Debit motor vehicle £1,400

    The finance company are financing the cost of the van so the entries are:

    Debit motor vehicle £8,000
    Credit Hire Purchase creditor £8,000


    Therefore motor vehicles = 8,400 + 1,400 = 9,400
    Hire purchase = £8,000


    Kind regards
    Steve
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:HP Liability

    Steve

    Thanks for getting back to me so soon, although I am still a little confused. I understnad what you are saying, but I just cant picture the whole thing. Would you mind having a look at my thought process below - I think it is the whole VAT issue that is confusing me:

    1) The purchase invoice for the van from company X is received, and recorded as DR F Asset 8000, DR VAT 1400, CR Creditors 9400

    2) Payment is made by us to the creditor, DR Creditors 9400, DR Bank 9400

    3) We then raise a sales invoice to the HP to sell the van to them (8000 + 1400), DR Debtors 9400, CR VAT 1400, CR F Assets 8000 (Hence removing all original entries)

    4) We then receive 1400 from the HP company (the deposit = vat), DR Bank, Cr Debtor

    5) We then receive the rest of the payment from the HP company, 8000, DR Bank CR Debtor

    It is at this point that I get stuck, as this leaves all my accounts as zero, yet I still need to put in a HP liability for £8000.

    If you are able to take a look at this I would be extremely grateful as i have cleared missed the point, but please do not feel pushed to do this asap as I am sure you have other things to do. If you would prefer to send a response via email, my email is sjbherself@yahoo.co.uk

    Many thanks in advance

    Sarah
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:HP Liability

    The vat isn't an issue because it is a contra entry. You debit the VAT control with the input vat on the original purchase and credit vat control with output vat on the sale.

    If you look at point two, you have made two debit entries. This could be the reason why you are out. It should be debit bank CREDIT creditors.

    Because the VAT is the same amount as the deposit I think this is where the confusion is coming from. The deposit has been paid by us before we sell it on to the HP company, hence why the HP balance is only £8,000.

    Hope that helps.

    Regards
    Steve
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:HP Liability

    My apologies, point 2 should have read DR Creditors, CR Bank to show us paying the original 9400 for the original purchase
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:HP Liability

    This is where you have gone wrong. We haven't paid for it - the HP company have financed it.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:HP Liability

    Try this:

    Apologies for the layout - the screens are absolute rubbish for laying out figures.

    Journal 1:
    Debit fixed assets 8,000
    Debit VAT 1,400
    Credit creditors 9,400

    Being introduction of Van

    Journal 2:
    Credit bank 1,400
    Debit fixed assets 1,400

    Being deposit paid for Van

    Journal 3:
    Debit debtors 9,400
    Credit VAT 1,400
    Credit fixed assets 8,000

    Being sale of van to HP company.

    Journal 4:
    Debit bank 9,400
    Credit debtors 9,400

    Being receipt from HP company re sale (including the VAT)

    Journal 5:
    Debit fixed assets 8,000
    Credit HP creditor 8,000

    Being balance of monies financed (9,400 less the deposit)

    Trial Balance should read:
    Fixed asset motor vehicle: £9,400
    HP creditor: £8,000


    Let me know how you get on.

    Steve
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:HP Liability

    Steve

    Many thanks for that, it is really helpful, I finally understand what is going on.

    Kind regards

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