Miranda Company contracted with Stewart Corporation to construct custom-made equipment. The equipment was completed and ready for use on January 1, 2009. Miranda paid for the machine by issuing a $200,000, 3-year note that bears interest at the rate of 4%, payable annually on December 31 each year. Since the machine was custom-built, the cash price was unknown. However, when compared to similar contracts, 10% was deemed to be a reasonable rate of interest.
Required:
1. Prepare the journal entry by Miranda to record the purchase.
2. Prepare journal entries to record interest for each of the first 2 years.

Question

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The Answer of Miranda Company contracted with Stewart Corporation to construct custom-made equipment. The equipment was completed and ready for use on January 1, 2009. Miranda paid for the machine by issuing a $200,000, 3-year note that bears interest at the rate of 4%, payable annually on December 31 each year. Since the machine was custom-built, the cash price was unknown. However, when compared to similar contracts, 10% was deemed to be a reasonable rate of interest.
Required:
1. Prepare the journal entry by Miranda to record the purchase.
2. Prepare journal entries to record interest for each of the first 2 years.

Miranda Company Contracted with Stewart Corporation to Construct Custom-Made Equipment