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 the buyer-lessor (Bancroft) should account for the lease transaction. 

b. Prepare the journal entries on January 1, 2019, December 31, 2019, and January 1, 2020, for Bancroft, the buyer-lessor.