Question

Rand Medical manufactures lithotripters. Lithotripsy uses shock waves instead of surgery to eliminate kidney stones. Physicians" Leasing purchased a lithotripter from Rand for $1,900,000 and leased it to Mid-South Urologists Group, Inc., on January 1, 2018. (EV of $1. PV of $1. EVA of $1. PVA of $1. EVAD of $1 and PVAD of $1 (Use appropriate fector(s) from the tables provided.) Lease Description: Quarterly lease payments Lease term No residual value; no purchase option Economic life of lithotripter Implicit interest rate and lessee's incremental borrowing rate Fair value of asset $123,990-beginning of each period 5 years (20 quarters) 5 years 12% $1,900,000 Required: 1. How should this lease be classified by Mid-South Urologists Group and by Physiclans' 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 $1.6 million. Prepare appropriate entries for Rand Medical from the beginning of the lease through the second lease payment on April 1, 2018. Complete this question by entering your answers in the tabs below. Required 2 Lessor Required 2 Required 3 Required 1 Lessee How should this lease be classified by Mid-South Urologists Group and by Physicians' Leasing? Finance lease Mid-South Urologists Group 7 of 10 Next > < Prev

Answer 1

Answer :-

1)Quarterly Payment = $123,990 - beginning of each month.

Lease term = 5 years (20 quarters)

Life of assets = 5 year

As per Lessee and Lessor Criteria, a lease should be treated as capital lease if satisfies any one of the following criteria:

1)There is no Title Transfer.

2)There is no Bargain Purchase option.

3)Lease term is at least 75% of useful life.

4)Present value of lease payment is exceeds 90%of fair value of the asset.

Midsouth should classified the lease as a capital lease because lease term and life of assets is the same here ie. 5 years.

Physician’s Leasing should classified the lease as Direct financing lease.

2) Journal Entries in the Book of Mid-South Urologists Group, Inc - Lessee.

Date	Particular	Debit	Credit
1/1/18	Leased asset Dr. To Lease payable	$1,900,000	$1,900,000
1/1/18	Lease payable Dr To Cash	$123,990	$123,990
1/4/18	Lease payable Dr. ($123,990 - $53,280) Interest expense Dr. To Cash	70,710 53,280	$123,990
	Notes - Interest expense = ( Present value of asset - Lease Payable at the time purchased) × (12/4)% Here 12% is divided by 4 because interest payable on quarterly Interest expense = (1,900,000 - 123,990 ) × 3% = 53,280

Journal Entries in the Book of Physicians’ Leasing - Lessor

Date	Particular	Debit	Credit
1/1/18	Lease receivable Dr. To Equipment	$ 1,900,000	$1,900,000
1/1/18	Cash Dr. To Lease receivable	$123,990	$123,990
1/4/18	Cash Dr. To Interest revenue   To Lease receivable ($123,990 - $53,280)	$123,990	$53,280 $ 70,710
	Notes - Interest receivable = ( Present value of asset - Lease receivable at the time purchased) × (12/4)% Here 12% is divided by 4 because interest payable on quarterly Interest receivable = (1,900,000 - 123,990 ) × 3% = 53,280

3) Journal Entries in the Book of Rand Medical

Date	Particular	Debit	Credit
1/1/18	Lease receivable Dr. To Sales	$1,900,000	$1,900,000
	Cost of goods sold Dr. To Equipment inventory	$1,600,000	$1,600,000
1/1/18	Cash Dr. To Lease receivable	$ 123,990	$123,990
1/4/18	Cash Dr. To Interest revenue To Lease receivable	$123,990	$53,280 $70,710