On June 30, 2018, the Esquire Company sold some merchandise to a customer for $4

Question

On June 30, 2018, the Esquire Company sold some merchandise to a customer for $48,000. In payment, Esquire agreed to accept a 9% note requiring the payment of interest and principal on March 31, 2019, The 9% 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? Complete this question by entering your answers in the tabs below Required Required 2 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. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) View transaction list Journal entry worksheet Record the sale of merchandise Note: Enter debits before credits. Date General Journal Debit Credit June 30, 2018 Record entry Clear entry View general journal

Explanation / Answer

Ans. 1

Journal Entry to record the Sale of Merchandise

($)

DEBIT

($)

CREDIT

Note : Since Notes Receivables are Current Asset and as per accounting rule when assets increases it should be debited hence notes receivable is debit. Sales revenue to be credited as it is the income of the business and income are to be credited.

Journal Entry to record for Interest Accrual

($)

DEBIT

($)

CREDIT

Note : Accrued Interest or Interest Receivable is an assets since it is increasing it has to be debited and we have recognize interest income upto December 31, 2018 it is to be credited.

Explanation :

Value of Interest income at December 31, 2018 would be as below

Period = 6 months ( from 30 June, 2018 to December 31, 2018)

[($ 48,000 * 9 %) * 6 / 120 = $ 2,160

Journal Entry to record for Collection of Principal and Interest

($)

DEBIT

($)

CREDIT

Note : Since Cash is received against Notes Receivalbe and Interest our current asset has increase and therefore cash to be debited. Simultanously Notes Receivable and Interest Receivalbe are fully adjusted i.e they are decreasing, they should be credited. Lastly, we have to recognize interest income for the year 2019, interest income has to be credited.

Explanation

Calculation of Interest Income as on March 31, 2018

Since, we have already recognized the interest income upto December 31, 2018. Now we are required to record interest income for the period of 3 months i.e. from January 1, 2019 to March 31, 2019

Hence Period = 3 months

Interest Amount =[( $ 48000 * 9 % ) * 3 / 12 ] = $ 1,080

Ans 2

If the December 31, 2018 adjustment entry for the interest accrual is not prepared, then

For 2018, the Income Before Income Taxes will be Understated by $ 2,160 and

For 2019, the Income Before Income Taxes will be Overstated by $ 2,160

Because the Income and Loss Statement has to include the expense and income relating to that particular period whether or not they have been paid or received. This is as per the accrual concept of accountancy.

In the present case if we are not preparing the adjustment entry for interest accrual, which means that we are not recognizing the interest income for the year 2018 and thereby understating the income for the year 2018.

Since we have not recorded the relevant interest income in 2018, we will record the full interest income at the time of collection of interest and principal i.e. in 2019. As we have recorded full interest income in 2019, which also includes interest income pertaining to 2018, hence overstating the income by $ 2,160.

DATE GENERAL JOURNAL

($)

DEBIT

($)

CREDIT

June 30, 2018 Note Receivable A/c Dr. $48,000 To Sales Revenue A/c $48,000 ( To record sales of Merchandise against notes)

Related Questions

Navigate

• Browse (All)
• Browse O
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.