Janet, Brian, and Natalie have recently negotiated a contract to provide all-natural granola bars on a weekly basis to a number of coffee shops in their area. As a result of the anticipated demand for the bars, they are making plans to purchase an additional commercial oven. The cost of this oven is estimated at $25,000, and the company already has $4,000 set aside for the purchase. Janet, Brian, and Natalie have met with their bank manager. She is willing to lend Santé Smoothies and Sweets Ltd. $21,000 on May 1, 2025, for a period of three years at a 4% interest rate. The bank manager has set out the following two payment alternatives:

Alternative 1: 

The terms provide for fixed principal payments of $3,500 plus interest on May 1 and November 1 of each year. 

Alternative 2: 

The terms provide for blended payments of $3,749 on May 1 and November 1 of each year. 

Janet, Brian, and Natalie ask you to help them decide which alternative is better for them.

Instructions 

a. Prepare instalment payment schedules for both of the alternatives for the full term of the loan. 

b. Prepare the journal entry for the purchase of the oven and the issue of the note payable on May 1, 2025. 

c. Prepare the journal entries for the first two instalment payments under each alternative. Assume that reversing entries have been recorded on any year-end accruals of interest. 

d. Determine the current portion of the note payable and the non-current portion of the note payable as at May 31, 2026, the company’s year end, under each alternative. 

e. Prepare the adjusting journal entries required at May 31, 2026, the company’s year end, under each alternative. Round amounts to the nearest dollar. 

f. Which payment alternative do you recommend? Why?