On June 1, 2012, Pitts Company sold some equipment to Gannon Company. The two companies entered into an installment sales contract at a rate of 8%. The contract required 8 equal annual payments with the first payment due on June 1, 2012. What type of compound interest table is appropriate for this situation?
A) Present value of an annuity due of 1 table.
B) Present value of an ordinary annuity of 1 table.
C) Future amount of an ordinary annuity of 1 table.
D) Future amount of 1 table.
Present value of an annuity due of 1 table
To determine the appropriate compound interest table for this situation, we need to consider the terms of the installment sales contract. The contract specifies that there will be 8 equal annual payments at an 8% interest rate.
Since the payments are going to be equal and made annually, we can eliminate options A (present value of an annuity due of 1 table) and C (future amount of an ordinary annuity of 1 table). These tables are used for situations where payments are not equal or are made at irregular intervals.
Now we are left with options B (present value of an ordinary annuity of 1 table) and D (future amount of 1 table).
Option B is used when we need to calculate the present value of a series of equal payments. However, in this case, we are not interested in finding the present value of the payments, but rather the future amount of those payments.
Therefore, the appropriate compound interest table for this situation is option D (future amount of 1 table). This table is used to find the future value of a single payment made at a given interest rate over a specific period of time, which aligns with the terms of the installment sales contract.