Question

On July 1, Goblette Company sold some machinery to another company. The two companies entered into an installment sales contract at a predetermined interest rate. The contract required 5 equal annual payments with the first payment due on July 1, the date of sale. What present value concept is appropriate for this situation

Answer 1

Answer:

The value of all future payments discounted by the interest rate

Explanation:

Since the purchase of the asset is by installments to be paid in the future. The present value to be recognized is the sum of the future payments discounted at the predetermined interest rate.

The first payment due now will not have to be discounted but future payments will have to be discounted to ascertain the present value of the asset to be recognized in the balance sheet.

Answer 2

Answer: Present Value of an annuity due of $1 for 5 periods

Explanation: Annuity could be described as a sort of investment which entitles the investor to receive a certain sum of money annually. Secondly, the present value of annuity refers to the current value of the payments to be paid from an annuity or future value payments paid from an annuity. It means "how much money would be needed today to fund a series of future annuity payments".

From the question above, the contract requires 5 equal annual amount, which is the period.

Therefore, the most appropriate present value concept will be:

Present Value of an annuity due of $1 for 5 periods