Assume that IBM leased equipment that was carried at a cost of $150,000 to Sharon Swander Company. The term of the lease is 6 years beginning January 1, 2011, with equal rental payments of $30,044 at the beginning of each year. All executory costs are paid by Swander directly to third parties. The fair value of the equipment at the inception of the lease is $150,000. The equipment has a useful life of 6 years with no salvage value. The lease has an implicit interest rate of 8%, no bargain purchase option, and no transfer of title. Collectibility is reasonably assured with no additional cost to be incurred by IBM. Prepare IBM's January 1, 2011, journal entries at the inception of the lease.
Related questions
Problem 15-3 Direct financing and sales-type lease; lessee andlessor [LO15-3, 15- 5, 15-6]
Rand Medical manufactures lithotripters. Lithotripsy uses shockwaves instead of surgery to eliminate kidney stones. Physicians'Leasing purchased a lithotripter from Rand for $2,000,000 andleased it to Mid-South Urologists Group, Inc., on January 1,2016. |
| LeaseDescription: | |||
| Quarterly leasepayments | $ | 130,516 âbeginning of eachperiod | |
| Lease term | 5 years (20 quarters) | ||
| No residual value;no BPO | |||
| Economic life oflithotripter | 5 years | ||
| Implicit interestrate and lessee's incremental borrowing rate | 12% | ||
| Fair value ofasset | $ | 2,000,000 | |
Collectibility of the lease payments is reasonably assured, andthere are no lessor costs yet to be incurred. |
| Required: |
| 1. | How should this lease be classified by Mid-South UrologistsGroup and by Physicians' Leasing? |
| 2. | Prepare appropriate entries for both Mid-South Urologists Groupand Physicians' Leasing from the inception of the lease through thesecond rental payment on April 1, 2016. Depreciation is recorded atthe end of each fiscal year (December 31). (If no entry isrequired for a particular transaction, select "No journal entryrequired" in the first account field.) |
| Mid-South Urologists Group(Lessee): |
| Physicians' Leasing(Lessor): |
| 3. | Assume Mid-South Urologists Group leased the lithotripterdirectly from the manufacturer, Rand Medical, which produced themachine at a cost of $1.7 million. Prepare appropriate entries forRand Medical from the inception of the lease through the secondlease payment on April 1, 2016. (If no entry is requiredfor a particular transaction, select "No journal entry required" inthe first account field.) |
