Question

11- Rand Medical manufactures lithotripters. Lithotripsy uses shock waves instead of surgery to eliminate kidney stones. Physicians’ Leasing purchased a lithotripter from Rand for $1,590,000 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	$	95,333—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	$	1,590,000

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 $1.4 million. Prepare appropriate entries for Rand Medical from the beginning of the lease through the second lease payment on April 1, 2021.

Answer 1

Rand Medical Requirement 1 Requirement 2 Date 1.1.2021 1.1.2021 1.4.2021 Payment Interest @ 2% Principal Balance 1590000 95333 95333 1494667 95333 29893 65440 1429227 PVMLP: Table 6, 20 payments @ 2% 16.67846 x $95,333 = $1,590,000 Lessee and Lessor Criteria (must satisfy at least one): 1. Title transfer? No 2. Bargain purchase option? No 3 Lease term 2 75% of useful life? Yes it is 100% (5-5) 4. PVMLP > 90% FMV? Yes, it is 100% ($1,590,000 = $1,590,000) Additional Criteria for Lessor (must satisfy both) 1. Collectibllity of lease payments is reasonably assured? Yes 2. No lessor costs yet to be incurred? Yes For lessee: Capital lease-meets 3rd and 4th criteria) For lessor: Direct financing lease-meets 3rd and 4th criteria and additional two criteria that are lessor specific, so it is a capital lease. Because the cost and FMV (PVMLP) are equal, this is direct financing.

Physicians' Leasing - Lessor Journal Enteries Date Particulars 1.1.2021 Lease receivable a/c To Equipment Dr. Debit in $ Credit in $ 1590000 1590000 1.1.2021 Dr. 95333 Cash a/c To Lease receivable 95333 1.4.2021 Dr. 95333 Cash a/c To Interest revenue To Lease receivable 29893 65440 Mid-South - Lessee Journal Enteries Date Particulars 1.1.2021 Leased asset a/c To Lease Payable Debit in $ Credit in $ Dr. 1590000 95333 1.1.2021 Lease Payable a/c To Cash 95333 1.4.2021 Lease Payable a/c Interest expense a/c To Cash Dr. Dr, 65440 29893 95333 318000 31.12.2021 Depreciation expense a/c Dr. To Accumulated depreciation ($1,590,000 - 5 years) 318000 Requirement 3 This would be a sales-type lease for Rand Medical because the cost of $1.4 million is not equal to the FMV/PVMLP of $1,590,000. Journal Enteries Date Particulars 1.1.2021 Lease receivable a/c To Sales Dr. Debit in $ Credit in $ 1590000 1590000 1400000 Cost of goods sold a/c Dr. To Equipment inventory 1400000 Dr. 95333 1.1.2021 Cash a/c To Lease receivable 95333 Dr. 95333 1.4.2021 Cash a/c To Interest revenue To Lease receivable 29893 65440