At the beginning of 2017, Gannon Company received a three-year zero-interest-bearing €1,000 trade note. The market rate for equivalent notes was 8% at that time. Gannon reported this note as a €1,000 trade note receivable on its 2017 year-end statement of financial position and €1,000 as sales revenue for 2017. What effect did this accounting for the note have on Gannon's net earnings for 2017, 2018, 2019, and its retained earnings at the end of 2019, respectively?

Question

Quizplus · Accepted Answer

In 2017, Gannon recognized the full €1,000 as revenue even though the note was zero-interest-bearing. This led to an overstatement of net earnings in 2017. 
In 2018 and 2019, no interest was recorded even though the market rate for equivalent notes was 8%, leading to an understatement of net earnings in both years. 
At the end of 2019, the retained earnings would be understated as a result of the understatement of net earnings in the past two years.

At the Beginning of 2017, Gannon Company Received a Three-Year