Reference no: EM132848971

Question - Diaz Creamery, leases its ice cream making equipment from Megan Finance Company under the following lease terms:

The lease term is five years, non-cancellable, and requires equal rental payments of $56,926 due at the beginning of each year starting January 1, 2019.

Upon inception of the lease on January 1, 2019, Megan purchased the equipment at its fair value of $280,000 and immediately transferred it to Diaz Creamery. The equipment has an estimated economic life of five years, the expected payout under the residual value guarantee is $15,000.

The lease contains no renewal options, and the equipment reverts to Megan Finance Company upon termination of the lease.

Diaz's incremental borrowing rate is 3.8%; the rate implicit in the lease is also 5%. The implicit rate in the lease is known by Diaz.

Diaz depreciates similar equipment that it owns on a straight-line basis.

Both companies have December 31 year-ends.

Required -

1. Determine the amount the right-of use asset and lease liability are initially measured at from the perspective of the lessee.

2. Prepare the lessee's amortization schedule for this lease for first three years.

3. Prepare the journal entries on January 1, 2019, December 31, 2019, and January 1, 2020 for the lessee.