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For the following five leases of Memorial Hospital, determine the appropriate

classification of each lease $($finance or operating$)$ and its proper treatment on the

financial statements. Prepare an amortization schedule for each lease $($this part is

NOT actually required for the entire term of the lease$).$ In addition, prepare the

journal entries to record the lease on the financial statements as of January $1,2018$

$($assuming a calendar fiscal year$)$ and the subsequent year$-$end entries for $2018,$

$2019,$ and $2020$ that reflect proper treatment using the new requirements for

accounting for leases. Please present and SUMMARIZE the difference between

operating and financing leases

the four criteria for classifying operating leases and capital leases: $($a$)$ the present value of the minimum lease payments must equal or exceed $90\%$ of the fair value of the asset; $($b$)$ the lease term must be at

least $75\%$ of the remaining useful life of the leased asset; $($c$)$ there is a bargain purchase at the end of

the lease; and $($d$)$ there is a transfer of ownership. To qualify as a capital lease and require balance

sheet reporting, at least one of these criteria had to be met; otherwise, the lease would be classified as

an operating lease and reported only on the income statement and in the footnotes.

$1)$ Lease $1$The lease was entered into on November $1,2012$ with Beaugard

Properties for a medical office tower attached to the hospital. The lease was

for $10$ years with an option to renew for an additional $10$ years. The lease

called for monthly payments in the amount of $$17,397\mathrm{.}76,$ with a $3\%$ annual

increase. The estimated value of the medical office tower was $$7,500,000.$

The incremental borrowing rate at the time the lease was finalized was $6\mathrm{.}3\%.$

$2)$ Lease $2$The lease was entered into on January $1,2013$ with Smith Family

Trust for land that the hospital occupied. The lease was for $20$ years with two

options to renew for $20$ years each. The lease called for monthly payments in

the amount of $$20,472\mathrm{.}07,$ with a $5\%$ increase every $10$ years. The estimated

value of the property was $$6,200,000.$ The incremental borrowing rate at the

time the lease was finalized was $6\mathrm{.}7\%.$

$3)$ Lease $3$The lease was entered into on March $1,2013$ with Managed

Medical Supply for infusion pumps. The lease was for seven years with a

monthly payment of $$13,785\mathrm{.}64$ and the exclusive purchase of consumables.

The estimated value of the pumps was $$750,000.$ The expected useful life of

the equipment was $10$ years. There was not an option to renew the lease. The

incremental borrowing rate at the time the lease was finalized was $7\mathrm{.}6\%.$

$4)$ Lease $4$The lease was entered into on October $1,2012$ with Copper View

Medical Supply for compression sleeves. The lease was for two years with a

monthly payment of $$6,886\mathrm{.}80$ and the exclusive purchase of consumables.

The estimated value of the compression sleeves was $$500,000.$ The expected

life of the equipment was $10$ years. There were five options to renew the

lease in increments of two years. The incremental borrowing rate at the time

the lease was finalized was $6\mathrm{.}3\%.$Renewal terms were consistent with the original lease terms

$5)$ Lease $5$The lease was entered into on January $1,2014$ with U$.$S$.$ Medical for

$20$ irrigation solution warmers. The lease did not indicate a term or any

extensions, but required the purchase of consumables. The estimated cost

for each warmer was $$7,500.$ The expected life of the equipment was seven

years. The incremental borrowing rate at the time the lease was finalized was

$6\mathrm{.}1\%.$

$($ Please include all the Journal Entries required for each lease. As well as all required formulas with the calculations. Also the lease classifications for each lease.$)$ Thank you.

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