Question

Rand 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.

Answer 1

Part 1

Mid-South Urologists Group	Capital lease (because lease term is above 75% of useful lie and also Present value of periodic lease payments is greater than fair market value)
Physicians' Leasing	Direct financing lease (above two conditions and two other conditions like no lessor costs are to be incurred as well as collectability of lease payments is assured)

Part 2

Physicians’ Leasing – Lessor

date	General journal	debit	Credit
1/1/18	Lease receivable	1,920,000
	Equipment		1,920,000
1/1/18	Cash	115,119
	Lease receivable		115,119
4/1/18	Cash	115119
	Interest revenue (2%*(1920000-115119))		36098
	Lease receivable		79021

Mid-South – Lessee

date	General journal	debit	Credit
1/1/18	Right-of-use asset	1,920,000
	Lease payable		1,920,000
1/1/18	Lease payable	115,119
	Cash		115,119
4/1/18	Lease payable	79021
	Interest expense (4%*(1920000-115119))	36078
	cash		115,119
12/31/18	Depreciation expense	384000
	Accumulated depreciation (1920000/5)		384000

Part 3

date	General journal	debit	Credit
1/1/18	Lease receivable	1,920,000
	Sales		1,920,000
	Cost of goods sold	1600000
	Equipment inventory		1600000
1/1/18	Cash	115,119
	Lease receivable		115,119
4/1/18	Cash	115119
	Interest revenue (4%*(1920000-115119))		36098
	Lease receivable		79021