Question

On June 30, 2024, the Esquire Company sold some merchandise to a customer for $54,000. In payment, Esquire agreed to accept a 7% note requiring the payment of interest and principal on March 31, 2025. The 7% 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, 2024 interest accrual, and the March 31, 2025 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 2024 and 2025?

Answer 1

The income before income taxes is 2024 understated by $1,890 and 2025 overstated by $1,890.

Income before taxes

Esquire Company journal entries

June 30, 2024

Debit Note receivable            $54,000

Credit Sales                              $54,000                  

Dec 31, 2024

Debit Interest receivable       $1,890

Credit Interest Income           $1,890

($54,000 x 7% x6/12)

March 31, 2025

Debit Cash      $56,835                      

Credit Interest receivable          $1,890

Credit Interest income          $945

($54000 x 7% x 3/12 )

Credit Note Receivable    $54,000

Therefore the income before income taxes is 2024 understated by $1,890 and 2025 overstated by $1,890.

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