Question

On June 30, 2018, the Esquire Company sold some merchandise to a customer for $70,000. In payment, Esquire agreed to accept a 5% note requiring the payment of interest and principal on March 31, 2019. 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, 2018 interest accrual, and the March 31, 2019 collection. 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 2018 and 2019?

Answer 1

Date	Account	debit	credit
June 30 2018	note receivable	70000
	sales revenue		70000
	[sales made against note]
dec 31 2018	Interest receivable	1750
	Interest revenue [70000*.05*6/12]		1750
	[interest accrued for 6 month [1july2018-31dec208]
march 312019	Cash	72625
	Interest receivable		1750
	Interest revenue [70000*.05*3/12]		875
	note receivable		70000

2)2018 income will be understated by $ 1750 if adjusting entry is not prepared and revenue for 6months accrued not recognised in 2018

2019 income will overstated by 1750 as same is the income for 2018