3. Exercise 7-14 Note receivable [LO7-7] On June 30, 2013, the Esquire Company s

Question

3.

Exercise 7-14 Note receivable [LO7-7]

On June 30, 2013, the Esquire Company sold some merchandise to a customer for $56,000. In payment, Esquire agreed to accept a 8% note requiring the payment of interest and principal on March 31, 2014. The 8% rate is appropriate in this situation.

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, 2013 interest accrual, and the March 31, 2014 collection. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field.)

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?

On June 30, 2013, the Esquire Company sold some merchandise to a customer for $56,000. In payment, Esquire agreed to accept a 8% note requiring the payment of interest and principal on March 31, 2014. The 8% rate is appropriate in this situation.

Explanation / Answer

DUration of Note Rxable Jun 30, 2013 to Mar 31,2014 is 9 months Int Rate is 8% & Sale is for $56000 So Int upto Dec 31, 2013 is 8%*56000*(6/12) = 2240 Also Int from Jan1 2014 to Mar 31, 2014 is 8%*56000*(3/12) =1120 Jun30, 2013 Note Rxable Dr 56000 Sales Cr 56000 (To record receoipt of Note Rxable) Dec 31, 2013 Int Rxable Dr 2240 Int Revenue Cr 2240 Mar 31, 2014 Cash Dr 59,360 Note Rxable Cr 56000 Int Rxable Cr 2240 Int Rev Cr 1120 2. If Dec31 2013 entry is not made, income before income taxes will be understated in 2013 and overstated in 2014

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