On September 31, 2054, Vault-Tec Corporation sold merchandise to a customer for $70,000. The cost of the merchandise was $25,000. In payment, Vault-Tec Corporation agreed to accept a 10%, 9 month note requiring the payment of interest and principal on June 30, 2055. The 10% is appropriate in this situation. Vault-Tec Corporation uses the perpetual inventory system and their year-end is December 31.

Instructions:

a) Prepare journal entries to record the sale of merchandise, the December 31, 2054 interest accrual, and the May 31, 2055 collection.

Hint: There are 4 required journal entries. Some journal entries may or may not require 3 accounts or more.

b) If the December 31 adjusting entry for the interest accrual is not prepared, by how much will pretax income be overstated or understated in 2054 and 2055?