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

1.

Date	Particular	Debit	Credit
Jun 30,2021	5% Notes Receivable	$ 32,000
	To Sales		$ 32,000
	(Being sold merchandise to customer)
Dec 31,2021	Interest Accured on 5% Notes	$ 800
	To Interest Income		$ 800
	(Being Interest of 6 months is accured [ $ 32,000*5%*6/12]
Mar 31,2022	Cash	$ 33,200
	To Interest Accured on 5% Notes		$ 800
	To Interest Income [ $ 32,000*5%*3/12]		$ 400
	To 5% Notes Receivable		$ 32,000
	(Being Collection of payment)

2.

Particular	2021	2022
Amount of Overstated or Understated	$ 800	$ 800
Impact of Income before income taxes	Understated	Overstated