Question

Problem 15-4 (Algo) Finance/sales-type lease; lessee and lessor (LO15-1, 15-2, 15-3] 5 Rand Medical manufactures lithotripters. Lithotripsy uses shock waves instead of surgery to eliminate kidney stones. Physicians' Leasing purchased a lithotripter from Rand for $1,750,000 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.) 3.5 points $114,201–beginning of each period 5 years (20 quarters) eBook 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 Reference 12% $1,750,000 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 $1.5 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.

Answer 1

Implicit Interest rate =	12% pa
Implicit Interest rate per Qtr =3%
There will be 20 Qtrly lease payments
out of which the first one will be on the first day of
lease. So 19 payments to be discounted @3% qtrly rate
PVIF factor @3% for 19 periods=(1-1.03^-19)/3%=		14.3239

Finidng PV of Min Lease Payments
DeatislParticulars	Cash flow	PV/PVIF Fcator	PV of Cash flow
First Lease payment	$               114,201	1.00	$                  114,201
Lease paymnet Q2 to 20	$               114,201	14.3239	$               1,635,799
Total :			$               1,750,000

So PV of Min Lease payments =	$            1,750,000
Fair Value of Equipment	$            1,750,000
Ans 1.
So Min value of lease payments is equal to the fair value of the asset.
The Lease period covers 100% of asset's useful life.
So the lease will be treated as Financial Lease between Lessor Physician's Leasing and Lessee
Mid-South Urlogist's Group.

	Ans 2.
	Journal Entry in the book of Physician's Leasing (Lessor)
Date	Account Title	Dr $	Cr $
Jan 1.2021.	Equipment	$            1,750,000
	Cash		$        1,750,000
	Lease Receivable	$            1,750,000
	Equipment		$        1,750,000
	Cash	$               114,201
	Lease Receivable		$           114,201
Apr 1.2021.	Cash	$               114,201
	Lease Receivable		$        65,127.03
	Interest Income		$        49,073.97
	Journal Entry in the book of Mid-South Urlogist's Groupg (Lessee)
Date	Account Title	Dr $	Cr $
Jan 1.2021.	Right-to-Use Asset	$            1,750,000
	Lease Payable		$        1,750,000
	Lease Payable	$               114,201
	Cash		$           114,201
Apr 1.2021.	Lease Payable	$            65,127.03
	Interest Expense	$            49,073.97
	Cash		$      114,201.00