Question

Rand Medical manufactures lithotripters. Lithotripsy uses shock waves instead of surgery to eliminate kidney stones. Physicians’ Leasing purchased a lithotripter from Rand for $2,660,000 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	$	159,487—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	$	2,660,000

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 $2.3 million. Prepare appropriate entries for Rand Medical from the beginning of the lease through the second lease payment on April 1, 2021.

Answer 1

1)

Mid South Urologist Group     Finance Lease
Physicians Leasing            Sale Type Lease

.

2)

Mid South Urologist Group

                                  Dr      Cr
1 Jan 2021
Right of Use Asset             2660000
Lease Payable                           2660000

1 Jan 2021
Lease Payable                   159487
Cash                                     159487

1 Apr 2021
Interest Expense                 50010           (2660000-159487)*2%
Lease Payable                    109477           (Bal Fig)
Cash                                     159487

Physicians Leasing           

1 Jan 2021
Lease Receivable               2660000
Equipment                               2660000

1 Jan 2021
Cash                            159487
Lease Receivable                         159487

1 Apr 2021
Cash                            159487
Lease Receivable                          109477
Interest Revenue                          50010

Workings:

2) PV of Lease Rentals

PMT = 130516

I/Y = 8% / 4 = 2%

N = 5 * 4 = 20

PV = 2000000 (In Excel =PV(2%,20,159487,1))

.

3)

Rand Medical

1 Jan 2021
Lease Receivable               2660000
Cost of Goods Sold             2300000
Sales Revenue                           2660000
Equipment                               2300000

1 Jan 2021
Cash                            159487
Lease Receivable                         159487

1 Apr 2021
Cash                            159487
Lease Receivable                          109477
Interest Revenue                          50010