1) Setup 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 & Relevant Facts: Quarterly lease payments of $130,516. The first payment is made at lease inception, with each subsequent quarterly payment made on the last day of the quarter (3/31, 6/30, 9/30, and 12/31). Lease term of 5 years (20 quarters). No residual value or purchase option. Economic life of lithotripter is 5 years. Implicit interest rate and lessee's incremental borrowing rate is 12% Fair value of the asset is $2,000,000 Requirements How should the lease be classified by Mid-South Urologists Group and by Physicians' Leasing? Explain your reasoning. Lease Classification: Reasoning: 1) Ownership Transfer? 2) Bargain Purchase Option? 3) Lease Term = 75% or more of asset life? 4) PV of Lease Payments = 90% or more? 5) Asset Specialized w no alt use for lessor? Yes/No 3% Outstanding 2) Date Cash Payment Interest Difference Lease Balance 3% 2) Date 1/1/18 Cash Payment Interest 1/1/18 3/31/18 6/30/18 9/30/18 12/31/18 3/31/19 6/30/19 9/30/19 12/31/19 3/31/20 6/30/20 9/30/20 12/31/20 3/31/21 6/30/21 9/30/21 12/31/21 3/31/22 3) 6/30/22 9/30/22 Outstanding Difference Lease Balance Prepare appropriate entries for both Mid-South Urologists Group and Physicians' Leasing from the beginning of the lease through the December 31, 2018. Date Account Description Mid-South Urologists Group (Lessee) Journal Entries Date Accoun Description 1/1/18 Debit Credit Debit Credit 3) Prepare appropriate entries for both Mid-South Urologists Group and Physicians' Leasing from the beginning of the lease through the December 31, 2018. Date Account Description Debit Credit Mid-South Urologists Group (Lessee) Journal Entries Date Accoun Description Debit Credit 1/1/18 1/1/18 3/31/18 6/30/18 9/30/18 12/31/18 12/31/18 Physicians' Leasing (Lessor) Journal Entries 12/31/18 12/31/18 Physicians' Leasing (Lessor) Journal Entries 1/1/18 1/1/18 3/31/18 6/30/18 9/30/18 12/31/18