Miranda Company contracted with Stewart Corporation to construct custom-made equipment. The equipment was completed and ready for use on January 1, 2013. Miranda paid for the machine by issuing a $200,000, three-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 of equipment.
2. Prepare journal entries to record interest for each of the first two 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, 2013. Miranda paid for the machine by issuing a $200,000, three-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 of equipment.
2. Prepare journal entries to record interest for each of the first two years.

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