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 2021 (FV of $1. PV of $1. EVA of $1. PVA of $1. FVAD of Stand PVAD of S1) (Use appropriate factor(s) from the tables provided.) Lease Description Quarterly lease payments $131,821-beginning of each period 5 years (20 quarters) No residual value no purchase option Economie life of lithotripter 5 years Implicit interest rate and lessee's incremental borrowing 126 rate Tair 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, 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 $17 million. Prepare appropriate entries for Rand Medical from the beginning of the lease through the second lease payment on April 1, 2021 Complete this question by entering your answers in the tabs below. R Reet ed 2 Lessee Required Lesser Required How should this lease be classified by Mid-South Urologists Group and by Physicians' Leasing?

Answer 1

Solution

1. How should be the lease by classified by mis-south urologists group and by physicians’ leasing:

Present value of minimum lease payments = table 6 value for 3% interest, period – 20 years x quarterly lease payments

= 15.32380 x $131,821 = $2,020,000

For Mid-South Urologists (Lessee)

No title transfer

No bargain purchase option.

The lease is capital lease. Satisfies 3^rd and 4^th criteria.

The lease term is equal or more than 75% of useful life – Yes the lease term is 100%. 5 years equals to useful life 5 years.

Also, PV of MLPs is more than or equal to 90% of FMV. Yes, the PV of MLPS = FMV = $2,020,000

Additional criteria for Physicians’ Leasing (Lessor):

Collectibility of lease payments is reasonably assured – Yes

No lessor costs to be incurred – Yes

Since the 3^rd and 4^th criteria are met, the lease is direct financing lease.

The additional two criteria (lessor – specific) are met, hence the lease is capital lease. Also, since cost and FMV are equal, the lease is direct financing.

2. Appropriate entries for both Mid-South Urologists Group and for Physicians’ Leasing from the inception of the lease:

Mid-South Urologists Group (Lessee):

Date	Cash Payment	Interest Expense (3%)	Principal	Balance
Jan 1, 2021				$2,020,000
Jan 1, 2021	$131,821		$131,821	$1,888,179
April 1, 2021	$131,821	$56,645	$75,176	$1,813,003

Entries in the books of lessor – Physicians’ Leasing

Date	Account Titles and Explanation	Debit	Credit
Jan 1, 2021	Lease Receivable	$2,020,000
	Equipment		$2,020,000
	(To record inception of lease)
Jan 1, 2021	Cash	$131,281
	Lease Receivable		$131,281
	(To record first quarterly payment)
April 1, 2021	Cash	$131,281
	Interest Revenue		$56,645
	Lease Receivable		$75,176
	(To record interest revenue and receipt of second payment)

Entries in the books of Mid-South Urologists (Lessee):

Date	Account Titles and Explanation	Debit	Credit
Jan 1, 2021	Lease Asset	$2,020,000
	Lease Payable		$2,020,000
	(To record lease inception)
Jan 1, 2021	Lease Payable	$131,281
	Cash		$131,281
	(To record first quarterly payment)
April 1, 2021	Interest Expense	$56,645
	Lease Payable	$75,176
	Cash		$131,281
	(To record second payment and interest expense; 3% x 1,888,179 = 56,645)
Dec 31, 2021	Depreciation Expense	$404,000
	Accumulated Depreciation		$404,000
	(To record depreciation expense on leased asset)

3. Rand Medical would record this as sales-type lease, since the cost of $1,700,000 is not equal to the FMV or PVMLP of $2,020,000.

Entries:

Date	Account Titles and Explanation	Debit	Credit
Jan 1, 2021	Lease Receivable	$2,020,000
	Sales		$2,020,000
	(To record lease)
Jan 1, 2021	Cost of Goods Sold	$1,700,000
	Equipment Inventory		$1,700,000
	(To record cost of equipment leased)
Jan 1, 2021	Cash	$131,281
	Lease Receivable		$131,281
	(To record first payment received)
April 1, 2021	Cash	$131,281
	Interest Revenue		$56,645
	Lease Receivable		$75,176