Distinguish between “leasing” and “hire purchase” highlighting how each is accounted for.
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CPA Section 2 Auditing and Assurance KASNEB Recent Questions and Answers
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ANSWER
Leasing:
The Rights to use an asset by one party called the lessee in return for rentals paid to another party called the lessor. The lessor retains ownership of the asset throughout the period of lease.
Hire Purchase:
An asset is acquired by way of installment payment, whereby ownership eventually passes to the buyer when the last installment has been paid.
Accounting issues:
Leasing:
The main issues in leases is making a distinction between an operating lease and a finance lease, and in addition in a finance lease how to deal with the interest i.e allocating in the interest over the lease period.
Hire Purchase:
In hire purchase the main issue is on how to allocate Gross profit and interest over the installment period by the seller and how to account for interest by the buyer.
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