Question

Rand Medical manufactures lithotripters. Lithotripsy uses shock waves instead of surgery to eliminate kidney stones. Physicians' Leasing purchased a lithotripter from Rand for $2,260,000 and leased it to Mid-South Urologists Group, Inc., on January 1, 2016. (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 $ 135,504 —beginning of each period Lease term 5 years (20 quarters) No residual value; no BPO Economic life of lithotripter 5 years Implicit interest rate and lessee's incremental borrowing rate 8 % Fair value of asset $ 2,260,000 Collectibility of the lease payments is reasonably assured, and there are no lessor costs yet to be incurred. 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 inception of the lease through the second rental payment on April 1, 2016. Depreciation is 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.) Mid-South Urologists Group (Lessee): Physicians' Leasing (Lessor): 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 inception of the lease through the second lease payment on April 1, 2016. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) rev: 02_13_2017_QC_CS-77827, 10_27_2017_QC_CS-107014 ReferenceseBook & Resources WorksheetLearning Objective: 15-0

Answer 1

Annual rate of borrowing	8%	Quarterly rate of borrowing	2%
Quarterly lease payments	135504
Quarter	Quarterly lease payments	PV factor @2%	Present value of quarterly lease
1	135504	0.980392	132847.1
2	135504	0.961169	130242.2
3	135504	0.942322	127688.4
4	135504	0.923845	125184.8
5	135504	0.905731	122730.1
6	135504	0.887971	120323.7
7	135504	0.87056	117964.4
8	135504	0.85349	115651.4
9	135504	0.836755	113383.7
10	135504	0.820348	111160.5
11	135504	0.804263	108980.9
12	135504	0.788493	106844
13	135504	0.773033	104749
14	135504	0.757875	102695.1
15	135504	0.743015	100681.5
16	135504	0.728446	98707.32
17	135504	0.714163	96771.88
18	135504	0.700159	94874.4
19	135504	0.686431	93014.11
20	135504	0.672971	91190.31
Present value of total lease payments			2215685
Fair value of the assets			2260000

Since the present value of total lease rental during the term of lease is close to the fair value of the lease asset thus, the lease can be termed as financial lease. Both the lessor as well as the lessee shall classified the lease as financial lease.

Note: The above table has been calculated assuming that the quarterly lease payments have been started from 01^st April, 2016.

In the books of Physician's Leasing
Date	Particulars	Debit ($)	Credit ($)
01-01-16	Mid-south Urologists Group Inc.	2215685
	Equipment		2215685
	(being the equipment is given on lease)
	Bank	135504
	Mid-south Urologists Group Inc.		135504
	(Being the first lase rental received)
01-04-16	Bank	135504
	Mid-south Urologists Group Inc.		135504
	(Being the second lease rental received)
	Mid-south Urologists Group Inc.	41603.61
	Interest		41603.61
	(Being interest on the outstanding amount is charged)
	Interest	41603.61
	Profit and loss account		41603.61
	(Being the interest is credited in the profit and loss account)

In the books of Mid-South Urologists Group Inc.
Date	Particulars	Debit ($)	Credit ($)
01-01-16	Leased assets	2215685
	Physicians Leasing		2215685
	(Being the asset is taken on lease)
	Physicians Leasing	135504
	Bank		135504
	(Being the lease payment is made)
01-04-16	Physicians Leasing	135504
	Bank		135504
	(Being the lease payment is made)
	Interest	41603.61
	Physicians Leasing		41603.61
	Depreciation	110784.2
	Leased assets		110784.2
	(Being the depreciation is charged)
	Profit and loss account	152387.8
	Interest		41603.61
	Depreciation		110784.2
	(Being the depreciation and interest are charged in profit and loss account)