Rand Medical manufactures lithotripters. Lithotripsy uses shock waves instead of surgery to eliminate kidney stones. Physicians' Leasing purchased a lithotripter from Rand for $1,900,000 and leased it to Mid-South Urologists Group, Inc., on January 1, 2018. (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 $123,990-beginning of each period 5 years (20 quarters) 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 12% $1,900, 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, 2018. 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 $1.6 million. Prepare appropriate entries for Rand Medical from the beginning of the lease through the second lease payment on April 1, 2018.
Rand Medical manufactures lithotripters. Lithotripsy uses shock waves instead of surgery to eliminate kidney stones. Physicians' Leasing purchased a lithotripter from Rand for $1,900,000 and leased it to Mid-South Urologists Group, Inc., on January 1, 2018. (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 $123,990-beginning of each period 5 years (20 quarters) 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 12% $1,900, 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, 2018. 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 $1.6 million. Prepare appropriate entries for Rand Medical from the beginning of the lease through the second lease payment on April 1, 2018.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:# Lease Case Study: Rand Medical and Lithotripter Leasing
Rand Medical manufactures lithotripters, which use shock waves instead of surgery to eliminate kidney stones. Physicians’ Leasing purchased a lithotripter from Rand for $1,900,000 and leased it to Mid-South Urologists Group, Inc., starting January 1, 2018.
## Lease Information
- **Quarterly lease payments**: $123,990 at the beginning of each period
- **Lease term**: 5 years (20 quarters)
- **No residual value**: No purchase option
- **Economic life of lithotripter**: 5 years
- **Implicit interest rate and lessee's incremental borrowing rate**: 12%
- **Fair value of asset**: $1,900,000
## Required Tasks
1. **Classification of Lease**: Determine how the lease should be classified by both Mid-South Urologists Group and Physicians’ Leasing.
2. **Prepare Lease Entries**:
- Record the appropriate entries for both Mid-South Urologists Group and Physicians’ Leasing from the start of the lease to the second rental payment on April 1, 2018.
- Ensure adjusting entries are recorded at the end of each fiscal year (December 31).
3. **Alternative Scenario**:
- Assume Mid-South Urologists Group leased the lithotripter directly from Rand Medical at a cost of $1.6 million.
- Prepare entries for Rand Medical covering from the start of the lease to the second lease payment on April 1, 2018.
## Instructions
Complete the questions using the designated tabs:
- **Required 1**: Classification of Lease by both parties.
- **Required 2 Lessee**: Entries by Mid-South Urologists Group.
- **Required 2 Lessor**: Entries by Physicians’ Leasing.
- **Required 3**: Entries for Rand Medical in the alternative scenario.
By following these instructions, participants will showcase their understanding of accounting practices in leasing transactions.
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