On October 1, Year 3, Eure Retailers signed a 4-month, 16% note payable to finance the purchase of holiday merchandise. At that date, there was no direct method of pricing the merchandise, and the note's market rate of interest was 11%. Eure recorded the purchase at the note's face amount. All of the merchandise was sold by December 1, Year 3. Eure's Year 3 financial statements reported interest payable and interest expense on the note for 3 months at 16%. All amounts due on the note were paid February 1, Year 4. As a result of Eure's accounting treatment of the note, interest, and merchandise, are Eure's Year 3 year-end Retained Earnings and Interest Payable correct? If not, are they overstated, or understated, by how much?
On October 1, Year 3, Eure Retailers signed a 4-month, 16% note payable to finance the purchase of holiday merchandise. At that date, there was no direct method of pricing the merchandise, and the note's market rate of interest was 11%. Eure recorded the purchase at the note's face amount. All of the merchandise was sold by December 1, Year 3. Eure's Year 3 financial statements reported interest payable and interest expense on the note for 3 months at 16%. All amounts due on the note were paid February 1, Year 4. As a result of Eure's accounting treatment of the note, interest, and merchandise, are Eure's Year 3 year-end
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