Question: J. Smith and Co. are retailers of electrical applicances. As from 1st July, 1953, they have sold goods on hire-purchase terms as well as for cash. The cash selling price of all their goods shows a gross profit of 33Í% on the cost price and 10% is added to the cash price to arrive at the hire-purchase price with payments spread over three years. In the Trading Account for the year to 30th June, 1954, set out below, the full profit including the additional 10% has been taken to credit on all hire-purchase sales during the year:

The firm has asked you to re-draw the account taking credit only for such proportion of the profit and additional 10% as the instalments actually received bear to the total payable under the agreements, excluding agreements cancelled during the year which are separately considered. Instalments actually received during the year amount to £2,046. The returns £770 represent unpaid instalments on goods returned, which have been included in the closing stock at a valuation of £500 compared with their original cost of £600. Prepare the revised Trading Account, and show by Journal entries how the adjustments in respect of the hire-purchase transactions for the year should be made in the books of the firm.

Re-printed by courtesy of the Association of Incorporated Accountants (S.A.A.).