Question

Rand Medical manufactures lithotripters. Lithotripsy uses shock waves instead of surgery to eliminate kidney stones. Physicians' Leasing purchased a lithotripter from Rand for $1,730,000 and leased it to Mid-South Urologists Group, Inc., on January 1, 2016. (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:
Quarterly lease payments	$	122,400	—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		16	%
Fair value of asset	$	1,730,000

   

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?

      

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.)

Mid-South Urologists Group (Lessee):

    

Physicians' Leasing (Lessor):

    

3.	Assume Mid-South Urologists Group leased the lithotripter directly from the manufacturer, Rand Medical, which produced the machine at a cost of $1.4 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.)

      

Answer 1