Question

Gustin Corp manufactures, sells, and leases medical equipment. Gustin Corp agrees to lease 3 CAT scanners, 2 MRIs, and 2 surgical Robots to Murray Hospital. The cost for Gustin to manufacture is 5,000,000. The lease term is eight years and requires eight lease payments of 1,800,000 each. Gustin expects the equipment to be worth 2,000,000 at the end of the lease but non of that amount is guaranteed by Murray hospital.

The lease begins on January 1, Year 1 and will last through December 31, Year 8. The first Lease payment of 1,800,000 is due on January 1, Year, 1 the next payment is due on December 31 year 1 and the remaining payments will continue on December 31 every year until the last one on December 31, Year 7. At the end of the lease term on December 31 Year 8 the medical equipment will be returned to Gustin Corp.

Both companies have December 31 fiscal year end. The implicit rate in the lease is 11 percent and Murray hospital is aware of that rate.

A.) Prepare journal entries for the first cash payment on January 1, year 1 for both the lessee and lessor.

B.) Provide any journal entries for the lessee and the lessor during year 1 including the second cash payment on December 31, year 1 for both the lessee and the lessor.

C .)Provide all journal entries for the lessee and the lessor during year 5.

D.) What amounts would the lessee and the lessor report on their income statement and on the balance sheet for year 5

E.) prepare all necessary entries on the books of the lessor and lessee at the termination of the lease on December 31, Year 8 assuming that the actual residual value of the equipment at the time is: A) 2,000,000 B) 3,000,000 C) 1,000,000

Answer 1

Only first 4 sub-parts have been solved.