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.
D) Future amount of 1 table
Because the installment payments are equal and occur at the end of each period, we need the future amount of 1 table to calculate the total amount that will be paid by Gannon Company over the 8-year period.
To determine the appropriate compound interest table for this situation, we need to understand the terms of the contract.
In an installment sales contract, the buyer agrees to make a series of payments over a specified period of time. In this case, the contract requires 8 equal annual payments. The interest rate for the contract is 8%.
To find the appropriate compound interest table, we need to find the formula or method used to calculate the payments in this type of contract. In this case, since the payments are equal and made at regular intervals, it indicates that the contract involves an annuity.
Now, let's consider the options:
A) Present value of an annuity due of 1 table: This table is used to find the present value of a series of future payments where the first payment is made immediately. It is not applicable in this situation since the first payment is due on June 1, 2012, not immediately.
B) Present value of an ordinary annuity of 1 table: This table is used to find the present value of a series of future payments where the first payment is made at the end of the period. This table is commonly used for calculating installment payments. It is likely to be the appropriate table for this situation.
C) Future amount of an ordinary annuity of 1 table: This table is used to find the future value of a series of equal periodic payments made at the end of the period. It is not applicable in this situation since we are interested in calculating the present value of the payments, not the future value.
D) Future amount of 1 table: This table is used to find the future value of a single sum. It is not applicable in this situation since we are dealing with a series of equal payments, not a single sum.
Based on the above analysis, the appropriate table for this situation is likely to be the B) Present value of an ordinary annuity of 1 table.