Question

Rand Medical manufactures lithotripters. Lithotripsy uses shock waves instead of surgery to eliminate kidney stones. Physicians' Leasing purchased a lithotripter from Rand for $2,710,000 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.) $191,737-beginning of each period 5 years (20 quarters) 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 5 years 16% $2,710,000 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 $2.3 million. Prepare appropriate entries for Rand Medical from the beginning of the lease through the second lease payment on April 1, 2021.

Answer 1

Required 1:
present value of minimum lease payments (PVMLP) = $191,737 *14.13394
present value of minimum lease payments (PVMLP) = $ 2,710,000 ( rounded)
here, present value of annuity n= 20 quarters   i=4 % per quarter is 14.13394
lessee and lessor must be satisfy Atleast one condition   below :
1)is there is transfer title = NO
2) is there is bargain purchase option = No
3) is there lease term is grater than or equal to 75% useful life = yes , it is 100 % ( 5 / 5 years)
4)is there PVMLP is greater than or equal to 90 % of fair market value = yes , it is 100 % ( $ 2,710,000/$2,710,000)
both additional condition must be satisfy to lessor :
1) is there collectibility of lease payments is to be reasonably assured = Yes
2) is there no lessor costs yet to incurred = yes
for lessee: ( Mid south urologists group)
for lessee point of view , it is capital lease because lessor satisfy the 3rd and 4th condition
for lessor: (physicians leasing)
for lessor point of view, Direct financing lease- satisfy 3rd nad 4 th condition and also additional two conditions
that are lessor specific , so, it is a capital lease because cost and fair market value ( PVMLP) are equal
so, this is a direct financing lease.

Required 2 :

Date	payments	interest (4%)	principal	Balance
01-01-2021				$ 2,710,000
01-01-2021	$ 191,737		$ 191,737	$2,518,263 {2,710,000-191,737}
04-01-2021	$ 191,737	$100,731 {2,518,263*4%}	$ 91,006	$2,427,257 {2,518,263 -91,006}

Date	General journal	Debit	Credit
	for lessor: ( physiciansleasing )
01-01-2018	Lease receivable	$ 2,710,000
	Equipment		$ 2,710,000
	( to record lease receivable on leased asset )
01-01-2018	Cash	$ 191,737
	Lease receivable		$ 191,737
	( to record payment received )
04-01-2018	Cash	$ 191,737
	Interest revenue		$100,731
	Lease receivable		$ 91,006
	( to record interest revenue and lease receivable )
	for lessee (Mid south urologists group)
01-01-2018	Leased asset	$ 2,710,000
	Lease payable		$ 2,710,000
	( to record lease payable on leased asset )
01-01-2018	Lease payable	$ 191,737
	Cash		$ 191,737
	( to record payment on leased asset)
04-01-2018	Lease payable	$ 91,006
	Interest expense	$100,731
	Cash		$ 191,737
	( to record interest expense and lease payable )
12/31/2018	Depreciation expense	$ 542,000
	Accumulated depreciation		$ 542,000
	( $2,710,000 / 5 years )
	( to record depreciation expense )

required 3:
	This is a sales type lease for Randi medical because the cost of 2.3 million is
	not equal to the fair market value / PVMLP of $ 2,710,000
Date	General journal	Debit	Credit
01-01-2018	Lease receivable	$ 2,710,000
	Sales		$ 2,710,000
	( to record sales )
01-01-2018	Cost of goods sold	$ 2,300,000
	Equipment inventory		$ 2,300,000
	( to record cost of goods sold )
01-01-2018	Cash	$ 191,737
	Lease receivable		$ 191,737
	( to record payment received )
04-01-2018	Cash	$ 191,737
	Interest revenue		$100,731
	Interest receivable		$ 91,006
	( to record interest revenue and lease receivable )