Question:
A Ltd purchased a machine on Hire Purchase system from B Ltd on January 1, 2024, paying immediately ₹20,000 and agreeing to pay three instalments of ₹20,000 each on December 31 every year. The cash price of the machine is ₹74,500 and Hire Vendor charges interest at 5% p.a. The amount of interest payable by A Ltd to B Ltd on December 31, 2024 is:
A Ltd purchased a machine on Hire Purchase system from B Ltd on January 1, 2024, paying immediately ₹20,000 and agreeing to pay three instalments of ₹20,000 each on December 31 every year. The cash price of the machine is ₹74,500 and Hire Vendor charges interest at 5% p.a. The amount of interest payable by A Ltd to B Ltd on December 31, 2024 is:
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Logic Tip: In hire purchase, interest is charged on the outstanding balance, i.e. cash price less the down payment (₹74,500 - ₹20,000 = ₹54,500).
Updated On: Oct 3, 2026
- ₹3,725
- ₹4,000
- ₹2,725
- ₹1,861
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The Correct Option is C
Solution and Explanation
Step 1: Understanding the Question:
• A machine of cash price ₹74,500 is bought on hire purchase on January 1, 2024, with ₹20,000 paid immediately.
• Interest at 5% p.a. is charged by the vendor on the outstanding balance, and we need the interest for the first year (to December 31, 2024).
Step 2: Detailed Explanation:
• Cash price ₹74,500 less down payment ₹20,000 = ₹54,500 outstanding on January 1, 2024.
• Interest for 2024 = 54,500 × 5/100 = ₹2,725.
• The old solution charged interest on the full cash price (₹3,725), ignoring the ₹20,000 paid at the start, which is wrong.
Step 3: Final Answer:
The correct option is (C) ₹2,725.
• A machine of cash price ₹74,500 is bought on hire purchase on January 1, 2024, with ₹20,000 paid immediately.
• Interest at 5% p.a. is charged by the vendor on the outstanding balance, and we need the interest for the first year (to December 31, 2024).
Step 2: Detailed Explanation:
• Cash price ₹74,500 less down payment ₹20,000 = ₹54,500 outstanding on January 1, 2024.
• Interest for 2024 = 54,500 × 5/100 = ₹2,725.
• The old solution charged interest on the full cash price (₹3,725), ignoring the ₹20,000 paid at the start, which is wrong.
Step 3: Final Answer:
The correct option is (C) ₹2,725.
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