Question

Rand Medical manufactures lithotripters. Lithotripsy uses shock waves instead of surgery to eliminate kidney stones. Physicians' Leasing purchased a lithotripter from Rand for $2,630,000 and leased it to Mid-South Urologists Group, Ic., 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: 171,628-beginning of each *period 5 years (20 quarters) Quarterly lease payments Lease term No residual value; no purchase option Economic life of lithotripter Implicit interest rate and lessee's incremental borrowing rate 5 years 12% $2,630,000 Fair value of asset Required: 1. How should this lease be classifled 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 $2.2 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. Required 2 Lessor Required 2 Lessee Required 1 Required 3 How should this lease be classified by Mid-South Urologists Group and by Physicians' Leasing? Mid-South Urologists Group Physicians' Leasing

Answer 1

Step o 1. An agreement of contract that is prepared to transfer the right to use the resources for a period of time for particular purpose is called a lease contract. step ② lessee lessor finance lease Sales Type lease --> Step ② Since the pv of lease payments is the same value (100%) as the fair value of the asset at the begginning date, they exceed "substantially all" of the FV of asset & all fair value criterion is met Calculation of pv of lease payments Particulars Amt ($) PV of periodic lease payments. off) ($ 171628 X 15-32380) 26 30000 crounded

1 1 Debit Credit Step Journal entry Date Account title Jan 1, 2021 Right-of use asset lease payable (To record the lease 2630000 26,30,000 payment) To record the entry of lease payment, right of use asset is to be debited & lease payable is to be credited as above. step Credit C Account Debit ($) title Date 171628 Jan 1, 2021 171628 lease payable Cash Clease payment) To record the lease payable above. entry of lease payment, debit & credit cash as shown

Step ② To record the entry and lease payable below debit interest expense & credit cash as shown April 1, 2021 Interest exp +3751 3.4. C$ 26, 30,000 - $ 141928) Lease payable 97,877 Cash Clease payment) 171628 Step® Lessor-P's leasing Entry is to record the equipment-2630000 Jan 1, 2021 lease receivable Alc Dr 2630000 2630,000 To Equipment Step ② Jan 1, 2021 17621 Cash Clease payments) Alcor 171628 To lease receivable (To record lease payment) Step ② Cash Ale Dr 141628 April. I, 97877 2001 To lease receivable (dift) 73751 To int eap (sl. x ($ 2630000 - 1716LD

step o RM (lessor) Jan 1, 2021 lease receivable ale Dr 26, 30,000 COGS Ale or 2200,000 To sales (pv) 26, 30,000 To Equipment 2209000 step Jan 1, 2021 Cash Clease payments)All Dr 171628 To lease receivable 171628 Step ② April, 2021 Cash Clease payments) All Dr 171629 To lease receivable (diff) 98877 To Int revenue. 7375)