On June 30, 2016, the Esquire Company sold some merchandise to a customer for $40,000. In payment, Esquire agreed to accept a 5% note requiring the payment of interest and principal on March 31, 2017. The 5% 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. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

1: Record the sale of merchandise.

2: Record the interest accrual.

3: Record the cash collection.

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?
2016 income before income taxes would be ________ by ________ 2017 income before income taxes would be ________ by ________