Miranda Company contracted with Stewart Corporation to construct custom-made equipment. 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 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.