Reference no: EM132614265

Adriano Corp. (Adriano) is a publicly accountable entity that manufactures high-end gazebos. In order to streamline the manufacturing of the steel frame for its gazebos, Adriano has entered into a lease agreement with Allpat Leasing (Allpat). Allpat will custom build a machine to manufacture the frames and will then lease the machine to Adriano. The machine was ready to be leased on December 31, 2018, and the residual value at the end of the lease will be essentially $0, as the machine will be of NO use to anyone else due to the customization. The terms of the lease are as follows:

Lease term Six years with ownership reverting to Allpat at the end of the lease.

Lease payments $101,224 per year paid each December 31, starting on December 31, 2018. This amount includes $2,000 of maintenance costs to be paid by Adriano.

Fair value of equipment $508,000

Residual value (guaranteed) $ 20,000

Adriano's incremental borrowing rate 6%

Allpat's implicit interest rate (known to Adriano) 8%

Estimated useful life Nine years

Adriano has correctly determined this to be a finance lease.

Problem 1: What are the journal entries for Adriano to record the initial lease and all the journal entries for the year ended December 31, 2019.