Question

On June 30, 2021, the Esquire Company sold some merchandise to a customer for $66,000. In payment, Esquire agreed to accept a 8% note requiring the payment of interest and principal on March 31, 2022. The 8% 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

The journal entries to record the sale of merchandise, interest accrual, and collection are provided along with the impact on income before income taxes if the December 31 adjusting entry is not prepared.

Step-by-step explanation:

To record the sale of merchandise, we debit the Accounts Receivable for $66,000 and credit the Sales Revenue for $66,000. To record the December 31, 2021 interest accrual, we debit the Interest Receivable for $1,320 and credit the Interest Revenue for $1,320. Finally, to record the March 31, 2022 collection, we debit the Cash for $67,320, the Note Receivable for $66,000, and the Interest Receivable for $1,320. We also credit the Interest Revenue for $1,320

If the December 31 adjusting entry for the interest accrual is not prepared, income before income taxes will be understated by $1,320 in 2021 and overstated by $1,320 in 2022.