Noninterest-bearing note receivable
Response to the following :
[This is a variation of problem 1 modified to focus on a noninterest-bearing note.]
On June 30, 2016, the Esquire Company sold some merchandise to a customer for $30,000 and agreed to accept as payment a noninterest-bearing note with an 8% discount rate requiring the payment of $30,000 on March 31, 2017. The 8% 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, 2016 interest accrual, and the March 31, 2017 collection.
2. What is the effective interest rate on the note?
Problem 1:
On June 30, 2016, 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, 2017. 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, 2016 interest accrual, and the March 31, 2017 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 2016 and 2017?