On December 1, 2008, Michael Hess Company sold some machinery to Shawn Keling Company. The two companies entered into an installment sales contract at a predetermined interest rate. The contract required four equal annual payments with the first payment due on December 1, 2008, the date of the sale. What present value concept is appropriate for this situation?
A) Future amount of an annuity of 1 for four periods
B) Future amount of 1 for four periods
C) Present value of an ordinary annuity of 1 for four periods
D) Present value of an annuity due of 1 for four periods.

Question

Quizplus · Accepted Answer

Since the first payment is due on the date of the sale, this constitutes an annuity due, where payments are made at the beginning of each period. The present value of an annuity due of 1 for four periods is the appropriate concept for calculating the present value of the payments under these conditions.

On December 1, 2008, Michael Hess Company Sold Some Machinery