Question

Exercise 7-18 (Static) Notes receivable [LO7-7]

On June 30, 2021, the Esquire Company sold some merchandise to a customer for $30,000. In payment, Esquire agreed to accept a 6% note requiring the payment of interest and principal on March 31, 2022. The 6% 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	General Journal	Debit	Credit
	June 30, 2021	Notes receivable	$30,000	-
		Sales revenue	-	$30,000
	December 31, 2021	Interest receivable	$900	-	($30,000 X 6% X 6/12)
		Interest revenue	-	$900
	March 31, 2022	Cash	$31,350
		Notes receivable		$30,000
		Interest receivable		$900
		Interest revenue		$450	($30,000 X 6% X 3/12)
2)	2021	Understated	$900
	2022	Overstated	$900