Problem 15-3 Direct financing and sales-type lease; lessee andlessor [LO15-3, 15- 5, 15-6]
Rand Medical manufactures lithotripters. Lithotripsy uses shockwaves instead of surgery to eliminate kidney stones. Physicians'Leasing purchased a lithotripter from Rand for $2,000,000 andleased it to Mid-South Urologists Group, Inc., on January 1,2016.
LeaseDescription: Quarterly leasepayments $ 130,516 âbeginning of eachperiod Lease term 5 years (20 quarters) No residual value;no BPO Economic life oflithotripter 5 years Implicit interestrate and lessee's incremental borrowing rate 12% Fair value ofasset $ 2,000,000
Collectibility of the lease payments is reasonably assured, andthere are no lessor costs yet to be incurred.
Required:
1. How should this lease be classified by Mid-South UrologistsGroup and by Physicians' Leasing?
2. Prepare appropriate entries for both Mid-South Urologists Groupand Physicians' Leasing from the inception of the lease through thesecond rental payment on April 1, 2016. Depreciation is recorded atthe end of each fiscal year (December 31). (If no entry isrequired for a particular transaction, select "No journal entryrequired" in the first account field.)
Mid-South Urologists Group(Lessee):
Physicians' Leasing(Lessor):
3. Assume Mid-South Urologists Group leased the lithotripterdirectly from the manufacturer, Rand Medical, which produced themachine at a cost of $1.7 million. Prepare appropriate entries forRand Medical from the inception of the lease through the secondlease payment on April 1, 2016. (If no entry is requiredfor a particular transaction, select "No journal entry required" inthe first account field.)
Problem 15-3 Direct financing and sales-type lease; lessee andlessor [LO15-3, 15- 5, 15-6]
Rand Medical manufactures lithotripters. Lithotripsy uses shockwaves instead of surgery to eliminate kidney stones. Physicians'Leasing purchased a lithotripter from Rand for $2,000,000 andleased it to Mid-South Urologists Group, Inc., on January 1,2016. |
| LeaseDescription: | |||
| Quarterly leasepayments | $ | 130,516 âbeginning of eachperiod | |
| Lease term | 5 years (20 quarters) | ||
| No residual value;no BPO | |||
| Economic life oflithotripter | 5 years | ||
| Implicit interestrate and lessee's incremental borrowing rate | 12% | ||
| Fair value ofasset | $ | 2,000,000 | |
Collectibility of the lease payments is reasonably assured, andthere are no lessor costs yet to be incurred. |
| Required: |
| 1. | How should this lease be classified by Mid-South UrologistsGroup and by Physicians' Leasing? |
| 2. | Prepare appropriate entries for both Mid-South Urologists Groupand Physicians' Leasing from the inception of the lease through thesecond rental payment on April 1, 2016. Depreciation is recorded atthe end of each fiscal year (December 31). (If no entry isrequired for a particular transaction, select "No journal entryrequired" in the first account field.) |
| Mid-South Urologists Group(Lessee): |
| Physicians' Leasing(Lessor): |
| 3. | Assume Mid-South Urologists Group leased the lithotripterdirectly from the manufacturer, Rand Medical, which produced themachine at a cost of $1.7 million. Prepare appropriate entries forRand Medical from the inception of the lease through the secondlease payment on April 1, 2016. (If no entry is requiredfor a particular transaction, select "No journal entry required" inthe first account field.) |
