Question

Janet, Brian, and Natalie have recently negotiated a contract to provide cupcakes on a weekly basis to a number of coffee shops in their area. As a result of the anticipated demand for cupcakes, 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 Koebel's Family Bakery Ltd. $21,000 on September 1, 2014, 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 on September 1 and March 1 of each year. Alternative 2: The terms provide for blended payments of $3,749 on September 1 and March 1 of each year. Janet, Brian, and Natalie ask you to help them decide which alternative is better for them. Instructions: (a) Prepare installment payment schedules for each 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 September 1, 2014. (c) Prepare the journal entries for the first two installment payments under each alternative. (d) Determine the current portion of the note payable and the non-current portion of the note payable as of July 31, 2015, the company's year-end, under each alternative. (e) Prepare the adjusting journal entries required at July 31, 2015, the company's year-end, under each alternative. (f) Which payment alternative do you recommend? Why?

          Janet, Brian, and Natalie have recently negotiated a contract to provide cupcakes on a weekly basis to a number of coffee shops in their area. As a result of the anticipated demand for cupcakes, 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 Koebel's Family Bakery Ltd. $21,000 on September 1, 2014, 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 on September 1 and March 1 of each year.

Alternative 2: The terms provide for blended payments of $3,749 on September 1 and March 1 of each year.

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

Instructions:
(a) Prepare installment payment schedules for each 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 September 1, 2014.
(c) Prepare the journal entries for the first two installment payments under each alternative.
(d) Determine the current portion of the note payable and the non-current portion of the note payable as of July 31, 2015, the company's year-end, under each alternative.
(e) Prepare the adjusting journal entries required at July 31, 2015, the company's year-end, under each alternative.
(f) Which payment alternative do you recommend? Why?

Added by Sebastian M.

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