On 31 December 20X6 Joseph’s Renovations Ltd. (JRL) entered into a lease to rent construction equipment that had the following terms:
• JRL’s incremental borrowing rate is 8%; prime rate is 6%; and the implicit rate known by JRL is 9%;
• The equipment’s fair value on 31 December 20X6 is $250,000 with a useful life of eight years and a residual value guarantee of $50,000;
• The lease term is for a period of five years with annual payments at the beginning of the year;
• The asset reverts back to the lessor at the end of the lease term and the expected payment under the guarantee is $20,000.

Required:
Prepare journal entries for the 20X6 and 20X7 fiscal years for JRL.