Cardillo Capital enters into a lease agreement with Vincent Motors to lease a delivery van with a fair value of $55,000 under a 36-month (3-year) lease. The van has an estimated useful life of 8 years. No initial direct costs are incurred by the lessor. Cardillo has an option to purchase the van at the end of the lease for its fair value. Monthly payments are $775 per month (payable on the first day of each month) with no cash down at inception. and there are no lease incentives. Cardillo does not know the rate implicit in the lease and will use its annual incremental borrowing rate of 5%. There is no transfer of title. Cardillo does not guarantee a residual value at the end of the lease term and pays all insurance and maintenance independently of the lease contract to a third party. Any sales tax charged is included in the lease payments. Cardillo paid $900 in initial direct costs on the lease commencement date. Cardillo has a fiscal year end of December 31, and prepares monthly financial statements. The lease starts on January 1.

Required

a. Classify the lease for Cardillo Capital.

b. Determine the initial measurement of the lease liability and right-of-use asset.

c. Prepare the partial amortization schedules needed to amortize the lease debt and the right-of-use asset for the first 3 months of the lease agreement.

d. Prepare the journal entries for the first 3 months of the lease.