Question

Rand Medical manufactures lithotripters. Lithotripsy uses shock waves instead of surgery to eliminate kidney stones. Physicians’ Leasing purchased a lithotripter from Rand for $2,020,000 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	$	131,821—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		12%
Fair value of asset	$	2,020,000

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 $1.7 million. Prepare appropriate entries for Rand Medical from the beginning of the lease through the second lease payment on April 1, 2018.

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

	Mid-South Urologists Group Physicians' Leasing

.Leasee. 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). (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in whole dollars and not in the millions of dollars. Round your answers to nearest whole dollars.)

Record lease.

Record cash payment..

Record cash payment?.

Lessor. 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). (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in whole dollars and not in the millions of dollars. Round your answers to nearest whole dollars.)

Record lease.

Record cash payment..

Record cash payment?.

?Required. Assume Mid-South Urologists Group leased the lithotripter directly from the manufacturer, Rand Medical, which produced the machine at a cost of $1.7 million. Prepare appropriate entries for Rand Medical from the beginning of the lease through the second lease payment on April 1, 2018. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in whole dollars and not in the millions of dollars. Round your answers to nearest whole dollars.).

.

Answer 1

ANSWER 1.

MID- SOUTH UROLOGISTS GROUP:- FINANCE LEASE

PHYSICIANS’S LEASING :- SALES TYPE LEASE

Capital lease to lessee; Direct financing lease to lessor.

Since the present value of minimum lease payments (same for both the lessor and the lessee) is greater than 90% of the fair value of the asset, the 90%recovery criterion is met.

CALCULATION OF THE PRESENT VALUE OF LEASE PAYMENT

PRESENT VALUE OF PERIODIC LEASE PAYMENT

($131821 x 15.32380** = $20,20,000) (ROUNDED)

** present value of an annuity due of $1: n=20, i=3%

**The lease term criterion is met also because the lease term is the entire estimated economic life of the assest.

ANSWER 2.

IN THE BOOKS	OF MID- SOUTH UROLOGISTS	GROUP	(LESSEE)
01/01/2018	RIGHT OF USE ASSET	$ 20,20,000
	LEASE PAYABLE		$ 20,20,000
01/01/2018	LEASE PAYABLE	$ 1,31,821
	CASH		$ 1,31,821
01/04/2018	INTEREST EXPENSES	$ 56,645
	LEASE PAYABLE	$ 75,176
	CASH		$ 1,31,821
IN THE BOOKS	OF PHYSIANS' LEASING	(LESSOR)
01/01/2018	LEASE RECEIVABLE	$20,20,000
	EQUIPMENT		$20,20,000
01/01/2018	CASH	$ 1,31,821
	LEASE RECEIVABLE		$ 1,31,821
01/04/2018	CASH	$ 1,31,821
	LEASE RECEIVABLE		$ 75,176
	INTEREST REVENUE		$ 56,645
IN THE BOOKS	OF RAND MEDICAL (LESSOR)
01/01/2018	LEASE RECIVABLE	$ 20,20,000
	COST OF GOODS SOLD	$ 17,00,000
	SALES REVENUE		$ 20,20,000
	EQUIPMENT		$ 17,00,000
01/01/2018	CASH	$ 1,31,821
	LEASE RECEIVABLE		$ 1,31,821
01/04/2018	CASH	$ 1,31,821
	LEASE RECEIVABLE		$ 75,176
	INTEREST RECEIVABLE		$ 56,645

CALCULATION:- 01/04/2018 INTEREST EXPENSE 3% OF ($20,20,000- $1,31,821)

= 3% * $1,88,8179

= $ 56,645