I am confused regarding the explanation provided by Wiley. Q: On 10/1/x1 Fleur Retailers signed a 4mn 16% NP to finance the purchase of merchandise. At that date, there was no direct method of pricing the merchandise and the note's market rate of interest is 11%. Fleur recorded the purchase at the note's face amount, all merchandise was sold by 12/1/x1. Fleur's year 1 FS reported interest payable and interest expense on the note for 3 months at 16%. All amounts due on the note were paid 2/1/x2. As a result of fleur's accounting treatment of the note, interest, and merchandise, which of the following items was reported correct?
Answer: 12/31/x1 RE (NO) 12/31/x1 Interest Payable (yes).
E: Since cost of goods sold was understated in year 1, not enough cost was deducted from sales, resulting in an overstatement of income and retained earnings. However, the interest expense for 3 months would also be misstated because it was calculated as 16% of the face value of the note rather than as 11% of the present value of the note. On February 1 when the note is paid these two effects will have offset each other. However, on December 31, year 1, retained earnings would be misstated. Interest payable was properly accrued at the 16% stated (cash) rate for the 3 months from the date the note was issued until year-end, resulting in the correct reporting of interest payable.
If interest expense for 3 months would be misstated bc it was calc as 16%, how would interest payable be correct?
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