Question

Gustin Corp manufactures, sells, and leases medical equipment. Gustin Corp agrees to lease 3 CAT scanners, 2 MRIs, and 2 surgical Robots to Murray Hospital. The cost for Gustin to manufacture is 5,000,000. The lease term is eight years and requires eight lease payments of 1,800,000 each. Gustin expects the equipment to be worth 2,000,000 at the end of the lease but non of that amount is guaranteed by Murray hospital.

The lease begins on January 1, Year 1 and will last through December 31, Year 8. The first Lease payment of 1,800,000 is due on January 1, Year, 1 the next payment is due on December 31 year 1 and the remaining payments will continue on December 31 every year until the last one on December 31, Year 7. At the end of the lease term on December 31 Year 8 the medical equipment will be returned to Gustin Corp.

Both companies have December 31 fiscal year end. The implicit rate in the lease is 11 percent and Murray hospital is aware of that rate.

1.) what kind of lease is this for Gustin Corp and for Murray Hospital?

2.)Record the lease on the books for both the lessee and the lessor at the inception of the lease on January 1, year 1.

3.)prepare the amortization table for the lessor

4.) prepare the amortization table for the lessee

5.) Prepare journal entries for the first cash payment on January 1, year 1 for both the lessee and lessor.

6.) Provide any journal entries for the lessee and the lessor during year 1 including the second cash payment on December 31, year 1 for both the lessee and the lessor.

7 .)Provide all journal entries for the lessee and the lessor during year 5.

8.) What amounts would the lessee and the lessor report on their income statement and on the balance sheet for year 5

9.) prepare all necessary entries on the books of the lessor and lessee at the termination of the lease on December 31, Year 8 assuming that the actual residual value of the equipment at the time is: A) 2,000,000 B) 3,000,000 C) 1,000,000

Answer 1

Answer :

(1).This lease is finance lease for both lessor and lesee

(2). Calculating the fair valuce of the equipment

Since, the lesee is aware of implicit rate used by lessor, the lessor's impicit rate 11% shall be used to discount the lease

Annual fixed lease payments	$18,00,000
1+PVA(11%,7yrs)	5.71220
PV of annual lease payments	$1,02,81,960
Unguaranteed residual value	$20,00,000
PV interest (11% 8 yrs)	0.43393
Pv of of residual value	$8,67,860
Fair value od the equipment	$1,11,49,820
(10281960 + 867860)

In the Books of Murray Hospital (Lessee)

Date	Particulars	Debit	Credit
Jan 1, Year 1	Equipment	1,11,49,820
	Lease payable		1,11,49,820
	(To record entering into finance lease agreement)

In the Books of Gustin corp (Lessor)

Date	Particulars	Debit	Credit
Jan 1, Year 1	Lease receivable	1,02,81,960
	Sale		1,02,81,960
	(To record entering into finance lease agreement)
Note : Only guaranteed resisual value shall be considered for lessor)

(3). Lease Amortizationn schedule (For Lessor)

Year	Opening principle	Installment amount	Interest at 11%	Principle adjustment	Closing principle
0	$1,02,81,960	$18,00,000	-	$18,00,000	$84,81,960
1	$84,81,960	$18,00,000	$9,33,016	$8,66,984	$76,14,976
2	$76,14,976	$18,00,000	$8,37,647	$9,62,353	$66,52,623
3	$66,52,623	$18,00,000	$7,31,789	$10,68,211	$55,84,412
4	$55,84,412	$18,00,000	$6,14,285	$11,85,715	$43,98,697
5	$43,98,697	$18,00,000	$4,83,857	$13,16,143	$30,82,554
6	$30,82,554	$18,00,000	$3,39,081	$14,60,919	$16,21,635
7	$16,21,635	$18,00,000	$1,78,365	$16,21,635	-

(4).Lease Ammortization schedule (For Lesee)

Year	Opening principle	Installmet amount	Interest at 11%	Principle adjustment	Closing principle
0	$1,11,49,820	$18,00,000	-	$18,00,000	$93,49,820
1	$93,49,820	$18,00,000	$10,28,480	$7,71,520	$85,78,300
2	$85,78,300	$18,00,000	$9,43,613	$8,56,387	$77,21,913
3	$77,21,913	$18,00,000	$8,49,410	$9,50,590	$67,71,323
4	$67,71,323	$18,00,000	$7,44,846	$10,55,154	$57,16,169
5	$57,16,169	$18,00,000	$6,28,779	$11,71,221	$45,44,948
6	$45,44,948	$18,00,000	$4,99,944	$13,00,056	$32,44,892
7	$32,44,892	$18,00,000	$3,56,938	$14,43,062	$18,01,830
8	$18,01,830	$20,00,000	$1,98,170	$18,01,830	-

(5). In theBooks of Murray Hospital (Lessee)

Date	Particulars	Debit ($)	Credit ($)
Jan 1, Year 1	Lease payment	18,00,000
	Cash		18,00,000
	(TO record first lease payment)

In the Books of Gustin Corp (Lessor)

Date	Particulars	Debit ($)	Credit ($)
Jan 1, Year 1	Cash	18,00,000
	Lease Receivable		18,00,000
	(To record first lease receipt)

(6). In the Books of Murray Hospital (Lessee)

Date	Particulars	Debit ($)	Credit ($)
Dec 31 Year 1	Lease payment	7,71,520
	Interest expense	10,28,480
	Cash		18,00,000
Dec 1 Year 1	Depreciation expense (11149820/8)	13,93,728
	Accumulated depreciation - Equipment		13,93,728

In the Books of Gustin corp (Lessor)

Date	Particulars	Debit ($)	Credit ($)
Dec 31, Year 1	Cash	18,00,000
	Interest revenue		9,33,016
	Lease Receivable		8,66,984
	(To record year end lease receipt)

(7) In the Books of Murray Hospital (Lessee)

Date	Particulars	Debit ($)	Credit ($)
Dec 31, Year 5	Lease payable	11,71,221
	Interest expense	6,28,779
	Cash		18,00,000
	(To record year end lease payment)
Dec 31 Year 5	Depreciation expense (11149820 / 8)	13,93,728
	Accumulated depreciation equipment		$13,93,728

In the Books of Gustin Corp (Lessor)

Date	Particulars	Debit ($)	Credit ($)
Dec 31 Year 5	Cash	18,00,000
	Interest revenue		4,83,857
	Lease Receivable		13,16,143
	(To record year end lease receipt)

(8)

For Lessee
	On income statement (expense side)
	Interest expense		$6,28,779
	Depreciation expense		$13,93,728
	On Balance sheet (Asset side)
	Equipment	$1,11,49,820
	(-) Accumulated depreciation	$69,68,638	$41,81,183
	On Balance sheet (Liability side)
	Lease payable balance		$45,44,948
For Lessor
	On Income statement (Income side)
	Interest Revenue		$4,83,857
	On Balance sheet (Asset side)
	Lease Receivable balance		$30,82,554