Intermediate Accounting 2 ass 1 E15-25, p15-3

P 15-3

Requirement 1

Because the quarterly payment is made at the beginning of each quarter, the present value of annuity due @ 3% for 20 periods is 15.3238.

Therefore, 15.32380 x $130,516 = $2,000,000

The Lessee and Lessor Criteria that are satisfied are:

  1. The Lease term is ≥ 75% of useful life (100% (5 ÷ 5).
  2. PV of Minimum Lease Payments is ≥ 90% Fair Market Value ($2,000,000 ÷ $2,000,000)

Additional Criteria for Lessor are both satisfied

  1. The collectibllity of lease payments is reasonably assured.
  2. No Lessor costs yet to be incurred

For the lessee (Mid-South Urologists Group) it is a Capital lease

For the Lessor (Physicians’ Leasing) it is a direct financing lease

Requirement 2

Date Payment Interest @ 3% Principal Balance
1/1/2011       2,000,000
1/1/2011 130,516 130,516 1,869.484
4/1/2011 130,516 56,085 74,431 1,795,053

 

Physicians’ Leasing – Lessor

1/1/11              Lease receivable                                  2,000,000

Equipment                                                       2,000,000

1/1/11              Cash                                                    130,516

Lease receivable                                              130,516

4/1/11              Cash                                                    130,516

Interest revenue                                              56,085

Lease receivable                                  74,431

Mid-South – Lessee

1/1/11              Leased asset                            2,000,000

Lease payable                                      2,000,000

1/1/11              Lease payable                          130,516

Cash                                                    130,516

4/1/11              Lease payable                          74,431

Interest expense                      56,085

Cash                                                    130,516

12/31/11          Depreciation expense ($2,000,000 ÷ 5 years)             400,000

Accumulated depreciation                                                      400,000

Requirement 3

Since the cost of $1.7million is not equal to the Fair Market Value/PV Minimum Lease Payment of $2,000,000, this would be a sales-type lease for the Rand Medical.

1/1/11              Lease receivable                                  2,000,000

Sales                                                                2,000,000

Cost of goods sold                              1,700,000

Equipment inventory                                      1,700,000

1/1/11              Cash                                        130,516

Lease receivable                                  130,516

4/1/11              Cash                                        130,516

Interest revenue                                  56,085

Lease receivable                                  74,431

 

E 15-25

  1. Effective rate times balance – J.
  2. Realization principle – K
  3. Minimum lease payments plus unguaranteed residual value- C
  4. Periodic lease payments plus lessee-guaranteed residual value -L
  5. PV of minimum lease payments plus PV of unguaranteed residual value – B
  6. Initial direct costs – N
  7. Rent revenue – D
  8. Bargain purchase option – M
  9. Leasehold improvements – E
  10. Cash to satisfy residual value guarantee – F
  11. Capital lease expense – G
  12. Deducted in lessor’s computation of lease payments – A
  13. Title transfers to lessee – H
  14. Contingent rentals – I
  15. Lease payments plus lessee-guaranteed and third-part-guaranteed residual value – O
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