Question

On June 30, 2021, the Esquire Company sold some merchandise to a customer for $68,000. In payment, Esquire agreed to accept a 9% note requiring the payment of interest and principal on March 31, 2022. The 9% 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

Answer:

2021 understated by $3,060

2022 overstated by $3,060

Explanation:

June 30, 2021

                                        DEBIT          CREDIT

Note receivable            $68,000

Sales                                                    $68,000

Dec 31, 2021 (July 1, 2021 to Dec 31 2021)

                                        DEBIT          CREDIT

Interest receivable       $3060

Interest Income                                   $3060

Working = 68,000 x 9% x6/12 = $3060

March 31, 2022  

                                        DEBIT          CREDIT

Cash                             72,590  

Interest receivable                              3,060

Interest income                                    1,530

Note Receivable                                   68,000

Working = 68000 x 9% x 3/12 =          1,530

2021 income will be understated by $3,060 if adjusting entry is not prepared and revenue is not recognized

2022 income will be overstated by $3,060