Question

Rand Medical manufactures lithotripters. Lithotripsy uses shock waves instead of surgery to eliminate kidney stones. Physicians’ Leasing purchased a lithotripter from Rand for $2,210,000 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) (Use appropriate factor(s) from the tables provided.)
   

Lease Description:
Quarterly lease payments	$	156,361—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		16%
Fair value of asset	$	2,210,000

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, 2021. 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 $1.9 million. Prepare appropriate entries for Rand Medical from the beginning of the lease through the second lease payment on April 1, 2021.

Answer 1

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

Solution:- The lease term is the entire estimated economic life of the assets.

Calculation of the present value of Lease payment

Present value of an annuity due of $1: number of periods (n) = 20 and interest rate (i) = 16% / 4 = 4%

According to Present value of an annuity due of $1 table, n = 20 and i = 4% = 14.1339

Requirement 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, 2021. Adjusting entries are recorded at the end of each fiscal year (December 31).

Solution:- Journal entries for Lessee (Mid-South Urologists)

Journal entries for Lessor (Physician Leasing)

Requirement 3:- Assume Mid-South Urologists Group leased the lithotripter directly from the manufacturer, Rand Medical, which produced the machine at a cost of $1.9 million. Prepare appropriate entries for Rand Medical from the beginning of the lease through the second lease payment on April 1, 2021.

Solution:-

Journal entries for Rand medical

I Hope, it was helpful. Please give me a THUMBS UP.

Thank you!!