Question

Rand Medical manufactures lithotripters. Lithotripsy uses shock waves instead of surgery to eliminate kidney stones. Physicians Leasing purchased a lithotripter from Rand for $1,920,000 and leased it to Mid-South Urologist Group, INC. On January 1, 2021.

Lease Description

Quarterly lease payments $115,119-beginning of each period

Lease Term 5 years (20 quarters)

No residual value; no purchase option

Economics life of lithotripter 5 years

Implicit interest rate and lessee's incremental borrowing rate 8%

Fair value of asset $1,920,000

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 Urologist Group leased the lithotripter directly from the manufacturer. Rand Medical, which produced the machine at a cost of $16 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) How should this lease be classified by Mid-South Urologists Group and by physicians' Leasing?

The life of equipment is 5 year and lease period is also 5 year which indicate this is the finance lease. However with IFRS16 the accounting treatment is not different for operating lease or finance lease in the books of lessee

2) 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).

Lease installment table bifurcating principle and interest :

Installment Number	Installment value	Opening Balance	Installment	Interest	Principal	Closing balance
1	115,119.00	1,920,000.00	115,119.00			1,804,881.00
2	115,119.00	1,804,881.00	115,119.00	36,097.62	79,021.38	1,725,859.62
3	115,119.00	1,725,859.62	115,119.00	34,517.19	80,601.81	1,645,257.81
4	115,119.00	1,645,257.81	115,119.00	32,905.16	82,213.84	1,563,043.97
5	115,119.00	1,563,043.97	115,119.00	31,260.88	83,858.12	1,479,185.85
6	115,119.00	1,479,185.85	115,119.00	29,583.72	85,535.28	1,393,650.56
7	115,119.00	1,393,650.56	115,119.00	27,873.01	87,245.99	1,306,404.58
8	115,119.00	1,306,404.58	115,119.00	26,128.09	88,990.91	1,217,413.67
9	115,119.00	1,217,413.67	115,119.00	24,348.27	90,770.73	1,126,642.94
10	115,119.00	1,126,642.94	115,119.00	22,532.86	92,586.14	1,034,056.80
11	115,119.00	1,034,056.80	115,119.00	20,681.14	94,437.86	939,618.94
12	115,119.00	939,618.94	115,119.00	18,792.38	96,326.62	843,292.31
13	115,119.00	843,292.31	115,119.00	16,865.85	98,253.15	745,039.16
14	115,119.00	745,039.16	115,119.00	14,900.78	100,218.22	644,820.94
15	115,119.00	644,820.94	115,119.00	12,896.42	102,222.58	542,598.36
16	115,119.00	542,598.36	115,119.00	10,851.97	104,267.03	438,331.33
17	115,119.00	438,331.33	115,119.00	8,766.63	106,352.37	331,978.96
18	115,119.00	331,978.96	115,119.00	6,639.58	108,479.42	223,499.54
19	115,119.00	223,499.54	115,119.00	4,469.99	110,649.01	112,850.53
20	115,119.00	112,850.53	115,119.00	2,257.01	112,861.99	(11.46)

Journal Entries :

Date	Account	Debit	Credit
1 jan 20	ROU of equipment	$1,920,000.00
	Lease obligation		$1,920,000.00
	(To record Lease transaction)
1 jan 20	Lease obligation	$115,119.00
	Cash		$115,119.00
	(Installment on lease)
1 Apr 20	Lease obligation	$79,021.38
	Interest charges	$36,097.62
	cash		$115,119.00
	(Installment on lease)
1 Jul 20	Lease obligation	$80,601.81
	Interest charges	$34,517.19
	cash		$115,119.00
	(Installment on lease)
1 Oct 20	Lease obligation	$82,213.84
	Interest charges	$32,905.16
	cash		$115,119.00
	(Installment on lease)
31 dec 20	Depreciaton on ROU of Equipment	$384,000.00
	ROU of equipment		$384,000.00
	(Depreciation)
1 Jan 21	Lease obligation	$83,858.12
	Interest charges	$31,260.88
	cash		$115,119.00
	(Installment on lease)
1 Apr 21	Lease obligation	$85,535.28
	Interest charges	$29,583.72
	cash		$115,119.00
	(Installment on lease)

3. Assume Mid-South Urologist Group leased the lithotripter directly from the manufacturer. Rand Medical, which produced the machine at a cost of $16 Million. Prepare appropriate entries for Rand Medical from the beginning of the lease through the second lease payment on April 1, 2021.

Journal Entries : (There seems to be type where cost is mentioned 16M instead of 1.6M since fair value is only 1.92M)

Date	Account	Debit	Credit
1 jan 20	Lease Receivable	$1,920,000.00
	Revenue from Sale of Machine		$1,920,000.00
	(Sales Transaction)
1 jan 20	Cost of Goods Sold	$1,600,000.00
	Inventory		$1,600,000.00
	(COGS recognition)
1 jan 20	Cash	$115,119.00
	Lease Receivable		$115,119.00
	(Installment on lease)
1 Apr 20	Cash	$115,119.00
	Interest Income		$36,097.62
	Lease Receivable		$79,021.38
	(Installment on lease)
1 Jul 20	Cash	$115,119.00
	Interest Income		$34,517.19
	Lease Receivable		$80,601.81
	(Installment on lease)
1 Oct 20	Cash	$115,119.00
	Interest Income		$32,905.16
	Lease Receivable		$82,213.84
	(Installment on lease)
1 Jan 21	Cash	$115,119.00
	Interest Income		$31,260.88
	Lease Receivable		$83,858.12
	(Installment on lease)
1 Apr 21	Cash	$115,119.00
	Interest Income		$29,583.72
	Lease Receivable		$85,535.28
	(Installment on lease)