Miranda Company contracted with Stewart Corporation to construct custom-madeequi
ID: 2594822 • Letter: M
Question
Miranda Company contracted with Stewart Corporation to construct custom-madeequipment. The equipment was completed and ready for use on January 1, 2016.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 themachine was custom-built, the cash price was unknown. However, when compared tosimilar 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 Frst two years.
Explanation / Answer
Interest = $200,000*4% = $8,000*(CPV at 10% for 3 years) =$8,000*2.48685 = $19,895
principal = $200,000 =$200,000*(PV at 10% for 3 years) =$200,000*0.75131=$150,262
Present value at 10% = ($19,895*$150,262) = $170,157
1) the journal entry by Miranda to record the purchase of equipment is:
Equipment $ 170,157
Discount on notes payable $29,843
Notes payable $200,000
2) journal entries to record interest for each of the First two years is:
For year 1:
Interest expense ($170,157*10%) $17,016
Discount on notes payable $9,016
Cash (200,000*4%) $8,000
For year 2:
Interest expense (170,157+17,016*10%) $17,917
Discount on notes payable $9,917
Cash (200,000*4%) $8,000