Question

On June 30, 2021, the Esquire Company sold some merchandise to a customer for $32,000. 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

Solution 1:

Journal Entries - Esquire Company
Date	Particulars	Debit	Credit
30-Jun-21	Note receivables Dr	$32,000.00
	To Sales revenue		$32,000.00
	(To record sales revenue)
31-Dec-21	Interest receivables Dr	$800.00
	To Interest revenue ($32,000*5%*6/12)		$800.00
	(To record interest accrual)
31-Mar-22	Cash Dr	$33,200.00
	To Note receivables		$32,000.00
	To Interest receivables		$800.00
	To Interest revenue		$400.00
	(To record collection at maturity)

Solution 2:

If the December 31 adjusting entry for the interest accrual is not prepared, then income before income taxes will be understated by $800 for 2021 and overstated by $800 for 2022.