Maker Corp. manufactures imaging equipment. Easy Leasing purchased an MRI machine from Maker for $950,000 and...

Maker Corp. manufactures imaging equipment. Easy Leasing purchased an MRI machine from Maker for $950,000 and leased it to Imaging Group, Inc. on January 1, 2018.

Lease description:
Quarterly rental payments	$61,995: beginning of each period
Lease term	5 years (20 quarters)
No residual value; no bargain purchase option
Economic life of MRI machine	5 years
Implicit interest rate and lessee’s incremental borrowing rate	12%
Fair value of asset	$950,000
Present value of an annuity due of $1: n = 20, i = 3%	15.3238

Required:
1. How should this lease be classified by Imaging Group and by Easy Leasing?
2. Prepare appropriate entries for both Imaging Group and Easy Leasing from the beginning of the lease through the second rental payment on April 1, 2018. Depreciation and amortization are recorded at the end of each fiscal year (December 31).
3. Assume Imaging Group leased the machine directly from the manufacturer, Maker Corp., which produced the machine at a cost of $650,000. Prepare appropriate entries for Maker from the beginning of the lease through the second rental payment on April 1, 2018.

Solutions

Expert Solution

1	Calculation of PV of Lease Payment
	Quaterly Payment	61995
	PV of Lease Payment	15.3238
	PV of Lease Payment	949999

Lease	Classification	Reason
Imaging Lease	Capital Lease	Lease term covers > 75% of economic life
Easy Leasing	Direct Financing Lease	No Profit accruing for Lessor

2	In the books of Imaging Group (Lessee)
	Date	Account Title	Debit	Credit
	Jan 01, 2018	Lease Asset	950000
		Lease Liability		950000
	Jan 01, 2018	Lease Liability	61995
		Cash		61995
	Apr 01, 2018	Interest Expense	26640
		Lease Liability	35355
		Cash		61995

	In the books of Easy Group (Lessor)
	Date	Account Title	Debit	Credit
	Jan 01, 2018	Lease Receivable	950000
		Lease Asset		950000
	Jan 01, 2018	Cash	61995
		Lease Receivable		61995
	Apr 01, 2018	Cash	61995
		Lease Receivable		26640
		Interest Income		35355

3	In the books of Maker (Lessor)
	Date	Account Title	Debit	Credit
	Jan 01, 2018	Lease Receivable	950000
		Cost of Goods Sold	650000
		Sales		950000
		Inventory		650000
	Jan 01, 2018	Cash	61995
		Lease Receivable		61995
	Apr 01, 2018	Cash	61995
		Lease Receivable		17640
		Interest Income		35355

ekkarill92 answered 1 year ago

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