Question

On December 1, 2017, Richards Company sold some machinery to Fleming 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, 2017, the date of the sale. What time value of money concept is appropriate for this situation?

Answer 1

Present value of an annuity due of 1 for 4 periods.

Step-by-step explanation:

Time value of money is the idea or concept that money available at the present time is worth more than the identical sum in the future due to its potential earning capacity. In this example the contract stipulate that the money be paid from the day of purchase ( present day), which is the 1st December 2017 for the period of 4 equal annual payments, hence the present value is the current starting amount.

Answer 2

Present value of an annuity due of 1 for 4 periods

Step-by-step explanation:

Installment Sales Contract means a contractual arrangement under which the selling price of products sold in the ordinary course of business is deferred.

Time value of money is the idea that money currently available is worth more than the same amount in the future because of its possible earning power.

In this situation the time value of money concept that is appropriate is the Present value of an annuity due of 1 for 4 periods.