On June 30, 2018, the Esquire Company sold some merchandise to a customer for $42,000. In payment, Esquire agreed to accept a 6% note requiring the payment of interest and principal on March 31, 2019. The 6% 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?

Assumption: 6% rate has been taken to be on per annum basis and the question has been solved accordingly.

Following would be the journal entries to record the transaction:

On date of transaction:

June 30 Notes Receivable A/C Dr.$42,000

To Sales $42,000

(Being a note received against goods sold recorded)

Adjusting entry:

Dec 31 Interest Receivable Dr. $ 1,260

To Interest Revenue A/C $1260

(Being 6 months interest due recorded)

On due date of notes receivable

March 31 Cash A/C Dr. 43,890

To Notes Receivable A/C $42000

To Interest Revenue A/C $1890

(Being payment for notes receivable received along with interest recorded)

2. If the adjusting entry for interest accrual is not recorded, the income for 2018 would be understated by $1260 and income for 2019 would be overstated by $1260.