On June 30, 2013, the Esquire Company sold some merchandise to a customer for $3

Question

On June 30, 2013, the Esquire Company sold some merchandise to a customer for $30,000. In payment, Esquire agreed to accept a 6% note requiring the payment of interest and principal on March 31, 2014. The 6% rate is appropriate in this situation.

1) 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 2013 and 2014?
a) 2013 income before incometaxes would beunderstated by?

b) 2014 income before income taxes would be overstated by?

Explanation / Answer

a)Accrued interest for 2013 = 30000 * .06 * 6/12

                                                  = $ 900

Entry:

Interest expense   Debit   900

Interest payable    credit 900

since no adjusting entry is passed ,therefore we have subtracted less expenses amounting to $ 900 ,therefore income before income taxes are overstated by 900

b)In 2014 ,I have charged entire expense in income statement including accrued interest pertaining to year2013 .

so income before tax is understated by $ 900 .

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