9.8 Hire purchase Flashcards Preview

Interpreting Financial & Accounting Information > 9.8 Hire purchase > Flashcards

Flashcards in 9.8 Hire purchase Deck (4)
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1
Q

What is meant by “hire purchase”?

A

An installment plan or arrangement for financing capital goods whereby the assets are hired with the option to purchase by paying an initial installment and replaying the balance plus interest over a period of time.

2
Q

What are the advantages of a hire purchase agreement?

A
  • usually a fixed term and deposit that fits the budget
  • usually flexible (e.g. length of term)
  • interest rates and monthly payment are fixed throughout the agreement, making financial planning easier.
  • assets are treated as an outright purchase, and so tax deduction is provided through capital allowance.
3
Q

What are the disadvantages of a hire purchase agreement?

A
  • assets may be repossessed by the lender if the buyer defaults on payment
  • total cost of the asset over the fixed term will be greater than buying it upfront.
  • hire purchase may tempt buyers to buy extravagant goods
4
Q

How is a finance lease different to a hire purchase?

A

In a finance lease, the lessee does not have the option to purchase the goods or equipment.

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