Rand Medical manufactures lithotripters. Lithotripsy uses shock waves instead of
ID: 2465586 • Letter: R
Question
Rand Medical manufactures lithotripters. Lithotripsy uses shock waves instead of surgery to eliminate kidney stones. Physicians' Leasing purchased a lithotripter from Rand for $2,940,000 and leased it to Mid-South Urologists Group, Inc., on January 1, 2016. Lease Description: Quarterly lease payments $ 191,858 —beginning of each period Lease term 5 years (20 quarters) No residual value; no BPO Economic life of lithotripter 5 years Implicit interest rate and lessee's incremental borrowing rate 12 % Fair value of asset $ 2,940,000 Collectibility of the lease payments is reasonably assured, and there are no lessor costs yet to be incurred. Required:
1. How should this lease be classified by Mid-South Urologists Group and by Physicians' Leasing?
MId South Urologists Group
Physicians' Leasing
Prepare appropriate entries for both Mid-South Urologists Group and Physicians' Leasing from the inception of the lease through the second rental payment on April 1, 2016. Depreciation is recorded at the end of each fiscal year (December 31). (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
Mid-South Urologists Group (Lessee):
a. Record lease.
b.Record cash payment. 1/1
c. Record cash payment. 4/1
Physicians' Leasing (lessor)
a. Record lease.
b.Record cash payment. 1/1
c. Record cash payment. 4/1
Assume Mid-South Urologists Group leased the lithotripter directly from the manufacturer, Rand Medical, which produced the machine at a cost of $2.5 million. Prepare appropriate entries for Rand Medical from the inception of the lease through the second lease payment on April 1, 2016. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
Record lease. 1/1/13
Record cash received. 1/1/16
Record cash received. 4/1/16
2.Prepare appropriate entries for both Mid-South Urologists Group and Physicians' Leasing from the inception of the lease through the second rental payment on April 1, 2016. Depreciation is recorded at the end of each fiscal year (December 31). (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
Explanation / Answer
Cost of Equipment 2,940,000 Quartely lease payment 191,858 Life 20 Quarters Lease Term 5 Years Economic Life 5 Years Implicit interest rate 0 Fair value of asset 2,940,000 Quartely lease 191,858 Cumulative discount factor 15.324 Present value of lease rental 2,940,032 Fair value of asset 2,940,000 Conclusion Equal Lease term (5 Years)is Equal to assets life (5 years) Based on above two different conclusion this should shall be reported as Financial Lease.
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