Rand Medical manufactures lithotripters. Lithotripsy uses shock waves instead of surgery to eliminate kidney stones. Physicians' Leasing purchased a lithotripter from Rand for $2,000,000 and leased it to Mid-South Urologists Group, Inc. on January 1, 2018.
Lease Description:
Quarterly lease payments .................... $130,516-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 ........................................................... $2,000,000
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 $1.7 million. Prepare appropriate entries for Rand Medical from the beginning of the lease through the second lease payment on April 1, 2018.