Problem 15-3 Direct financing and sales-type lease; lessee and lessor [LO15-3, 1
ID: 2408499 • Letter: P
Question
Problem 15-3 Direct financing and sales-type lease; lessee and lessor [LO15-3, 15-5, 15-6] Rand Medical manufactures lithotripters. Lithotripsy uses shock waves instead of surgery to eliminate kidney stones. Physicians' Leasing purchased a lithotripter from Rand for $1,590,000 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 Lease term No residual value; no BPO Economic life of lithotripter Implicit interest rate and lessee's incremental borrowing rate Fair value of asset $103,760-beginning of each period 5 years (20 quarters) 5 years 12% $1,590,000 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' LeasingExplanation / Answer
Journal Entry in The Books of Mid-South Urologist Date Explanation Debit Credit 01/01/2016 Leased equipment $1,590,000 Lease payable $1,590,000 To Record Lease 01/01/2016 Lease payable $103,760 Cash $103,760 To Record Initial Lease Payment 01/04/2016 Interest expense $44,587 Lease payable (Bf) $59,173 Cash $103,760 (1590000-103760)*3% To Record Interest Expense and Lease payment Journal Entry in The Books of Phyisicans Leasing 01/01/2016 Lease Receivable $1,590,000 Inventory of equipment $1,590,000 To Record Lease 01/01/2016 Cash $103,760 Lease Receivable $103,760 To Record Payment Received 01/04/2016 Cash $103,760 Lease Receivable $59,173 Interest Revenue $44,587 To Record Interest Income and Payment Received 3. In the Books Rand's Medical 01/01/2016 Lease Receivable $1,590,000 Cost of goods sold $1,200,000 Sales Revenue (P.V Calc above) $1,590,000 Inventory of equipment (Lessor Cost) $1,200,000 To Record Lease 01/01/2016 Cash $103,760 Lease Receivable $103,760 To Record Payment Received 01/04/2016 Cash $103,760 Lease Receivable $59,173 Interest Revenue $44,857 To Record Interest Income and Payment Received Calculation of the Present Value of Minimum Lease Payments Present value of periodic lease payments 15.324*103760 = 1590000(Rounded) (present value of an annuity due of $1: n=20, i=(12%/4)=3%)