Assume that Bergamini Builders leases medical equipment from Saint Martin's Machine Company. The lease term is for 7 years, and Bergamini must pay seven annual rentals of $40,000 beginning on January 1, 2019, of the current year and every January 1 afterward. The implicit rate in the lease is 3.5%. Bergamini prepaid Saint Martin's Machine Company the first payment of $40,000 on December 31, 2018 (the date the lease is executed, which is prior to the lease commencement date). Bergamini received $15,000 from Saint Martin's Machine Company on the commencement date as an incentive to enter the lease agreement Bergamini inclined initial direct costs of $5,000 that were originally recorded as prepaid initial direct costs on December 31, 2018. The equipment has no residual value.

Required

a. Determine the lessee's initial measurement of the lease liability and the right-of-use asset. Note that the initial measurement is the same for both operating and finance leases.

b. Prepare all journal entries necessary in order for Bergamini to record the transactions described in the facts provided.