Question

Rand Medical manufactures lithotripters. Lithotripsy uses shock waves instead of surgery to eliminate kidney stones. Physicians’ Leasing purchased a lithotripter from Rand for $2,300,000 and leased it to Mid-South Urologists Group, Inc., on January 1, 2021. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1)

Lease Description:
Quarterly lease payments	$	150,093—beginning of each period
Lease term		5 years (20 quarters)
No residual value; no purchase option
Economic life of lithotripter		5 years
Implicit interest rate and lessee's incremental borrowing rate		12%
Fair value of asset	$	2,300,000

1. How should this lease be classified by Mid-South Urologists Group and by Physicians' Leasing.

	Mid-South Urologists Group Physicians' Leasing

2.Prepare appropriate entries for Mid-South Urologists Group from the beginning of the lease through the second rental payment on April 1, 2021. Adjusting entries are recorded at the end of each fiscal year (December 31). (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in whole dollars and not in the millions of dollars. Round your answers to nearest whole dollars.

Journal entry worksheet

3..Prepare appropriate entries for Mid-South Urologists Group from the beginning of the lease through the second rental payment on April 1, 2021. Adjusting entries are recorded at the end of each fiscal year (December 31). (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in whole dollars and not in the millions of dollars. Round your answers to nearest whole dollars.)

Journal entry worksheet

4.Prepare appropriate entries for Mid-South Urologists Group from the beginning of the lease through the second rental payment on April 1, 2021. Adjusting entries are recorded at the end of each fiscal year (December 31). (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in whole dollars and not in the millions of dollars. Round your answers to nearest whole dollars.

Answer 1

1)
Mid-South Urologists Group	Capital lease
Physicians' Leasing	Direct financing lease
Since the present value of minimum lease payments (same for both the lessor and the lessee) is greater than 90% of the fair value of the asset, the 90% recovery criterion is met.
Present value of periodic lease payments = $150093  x 15.32380	$                                                            3,000,000	rounded
present value of an annuity due of $1: n=20, i=3%	15.3238
2)
1-Jan	Leased Equipment	$                3,000,000
	LeasePayable (Present value of minimum lease payments)		$     3,000,000
1-Jan	Lease Payable	$                   150,093
	Cash (Quarterly lease Payment)		$        150,093
1-Apr	Interest expense (3% x [$3000000 - 150093 ])	$                     85,497
	Lease payable (difference)	$                     64,596
	Cash (lease payment)		$        150,093