Question

and Medical manufactures lithotripters. Lithotripsy uses shock waves instead of surgery to eliminate kidney stones. Physicians’ Leasing purchased a lithotripter from Rand for $1,920,000 and leased it to Mid-South Urologists Group, Inc., on January 1, 2018. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Lease Description:
Quarterly lease payments	$	115,119—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		8%
Fair value of asset	$	1,920,000

Required:
1. How should this lease be classified by Mid-South Urologists Group and by Physicians' Leasing?
2. Prepare appropriate entries for both Mid-South Urologists Group and Physicians' Leasing from the beginning of the lease through the second rental payment on April 1, 2018. Adjusting entries are recorded at the end of each fiscal year (December 31).
3. Assume Mid-South Urologists Group leased the lithotripter directly from the manufacturer, Rand Medical, which produced the machine at a cost of $1.6 million. Prepare appropriate entries for Rand Medical from the beginning of the lease through the second lease payment on April 1, 2018.

Complete this question by entering your answers in the tabs below.

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 both Mid-South Urologists Group and Physicians' Leasing from the beginning of the lease through the second rental payment on April 1, 2018. 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.)

Requested: Lessee Journal Entry

* Record Lease Jan 01, 2018

*Record Cash Payment Jan 01, 2018

*Record Cash Payment. April 01, 2018

Requested: Lesor Journal Entry

* Record Lease Jan 01, 2018

* Record cash received.  Jan 01, 2018

* Record cash received. April 01, 2018

3. Requested: Assume Mid-South Urologists Group leased the lithotripter directly from the manufacturer, Rand Medical, which produced the machine at a cost of $1.6 million. Prepare appropriate entries for Rand Medical from the beginning of the lease through the second lease payment on April 1, 2018. (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.)

* Record Lease Jan 01, 2018

* Record cash received.  Jan 01, 2018

* Record cash received. April 01, 2018

Answer 1

1	Present value of Minimum lease payments:
						$
	Quarterly lease payments					115119
	Present value @ 4% For 20 years *					16.67846
	Present value of Minimum lease payments					1920008
	It can be taken as $1920000
	*
	Incremental borrowing rate=8%
	Lease is payable Quarterly, Interest per lease period=8*1/4=2%
	Total quarterly period=5 years*4 quarter periods per year=20 Quarter periods
	lease is payable at the beginning of the period
	Hence, while computing present value,PV factor for the first period will be 1.
	For the next priod will be PV factor for first year
	For the next priod will be PV factor for second year and so on
	Lease term (5 years) covers more than 75% of the useful life (5 years) of equipment
	Present value of minimum lease payment ($ 1920000) covers more than 90% of fair value of equipment ($ 1920000)
	Hence, this lease can be classified as follows for each parties:
	Mid-South Urologists Group			Finance lease
	Physicians' Leasing			Sales-type lease
2	In the books of Mid-south urologist group:
	Date	Account titles and explanation			Debit	Credit
	2018
	Jan 1.	Leased equipment			1920000
		Lease liability				1920000
		(Finance lease recorded)
		Lease liability			115119
		Cash				115119
		(lease payment recorded)
	Apr 1.	Lease liability			79021
		Interest expense	(1920000-115119)*2%		36098
		Cash				115119
		(lease payment recorded)
	In the books of Physicain's leasing:
	Date	Account titles and explanation			Debit	Credit
	2018
	Jan 1.	Lease receivable			1920000
		Equipment				1920000
		(Sales-type lease recorded)
		Cash			115119
		Lease receivable				115119
		(Lease payment received)
	Apr 1.	Cash			115119
		Lease receivable				79021
		Interest revenue	(1920000-115119)*2%			36098
		(Lease payment received)
3	In the books of Rand medicals:
	Date	Account titles and explanation			Debit	Credit
	2018
	Jan 1.	Lease receivable			1920000
		Cost of goods sold			1600000
		Sales revenue				1920000
		Equipment				1600000
		(Lease recorded)
		Cash			115119
		Lease receivable				115119
		(Lease payment received)
	Apr 1.	Cash			115119
		Lease receivable				79021
		Interest revenue	(1920000-115119)*2%			36098
		(Lease payment received)