Question

On June 30, 2021, the Esquire Company sold some merchandise to a customer for $40,000. In payment, Esquire agreed to accept a 5% note requiring the payment of interest and principal on March 31, 2022. The 5% rate is appropriate in this situation.
  
Required:
1. Prepare journal entries to record the sale of merchandise (omit any entry that might be required for the cost of the goods sold), the December 31, 2021 interest accrual, and the March 31, 2022 collection. (Do not round intermediate calculations.)
2. If the December 31 adjusting entry for the interest accrual is not prepared, by how much will income before income taxes be over-or understated in 2021 and 2022?

Answer 1

1.

Date	Account Titles and Explanation	Debit	Credit
Jun-30	Notes receivable	$40,000	-
	Sales revenue	-	$40,000
Dec-31	Interest receivable ($40,000 X 5% X 6/12)	$1,000	-
	Interest revenue	-	$1,000
Mar-31	Cash	$41,500	-
	Interest receivable	-	$1,000
	Interest revenue ($40,000 X 5% X 3/12)	-	$500
	Notes receivable	-	$40,000

2.

2021 income before income taxes be understated by $1,000

2022 income before income taxes be overstated by $1,000