Question

On June 30, 2021, the Esquire Company sold some merchandise to a customer for $42,000. 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

Answer:

Explanation:

The journal entries are shown below:

On June 30,

Note receivable A/c Dr  $42,000

   To Sales revenue  $42,00

(Being note receivable is sold)

On December 31

Interest receivable A/c Dr $1,260

   To Interest revenue A/c  $1,260

(Being accrued interest is recorded)

The computation of accrued interest is shown below:

= Principal × rate of interest × number of months ÷ (total number of months in a year)

= $42,000 × 6% × ( 6 months ÷ 12 months)

= $1,260

The 6 months is calculated from June 30 to December 31

On March 31

Cash A/c Dr $43,890

    To Interest receivable $1,260

    To Interest revenue $630

    To Note receivable $42,000

(Being cash received in respect of note receivable, interest accrual is recorded)

The computation of accrued interest is shown below:

= Principal × rate of interest × number of months ÷ (total number of months in a year)

= $42,000 × 6% × ( 3 months ÷ 12 months)

= $630

The 3 months is calculated from December 31 to March 31

2. In 2021 the income would be understated by $1,260 and revenue is also not recognized

In 2022 income is overstated by $1,260 as the income is the same in 2021