On January 1, 2019, Devlin Company (seller-lessee) sold heavy-duty equipment to Bancroft Bank (buyer-lessor) for its fair market value of $6,400,000 and immediately leased it back under a 20-year non-cancellable lease at $765,022 per year, first payable on the commencement date. The remaining useful life of the equipment is 20 years, at which time its residual value is expected to be $0. Devlin Company must return the asset to Bancroft at the end of the lease term. Bancroft used an implicit rate of 12% to determine the lease payments and this is readily determinable by Devlin. The equipment had a carrying value of $4,000,000 on Devlin’s books. Both companies have a December 31 year end and both companies depreciate this type of asset on a straight-line basis. 

Required:

a. Evaluate how Devlin, the seller-lessee, should account for the lease transaction. 

b. For Devlin, the seller-lessee, determine the value of the ROU asset and lease liability at initial recognition. 

c. Prepare the journal entries on January 1, 2019, December 31, 2019, and January 1, 2020, for Devlin, the seller-lessee.