Cullumber Industries and Riverbed Inc. enter into an agreement that requires Riverbed Inc. to build three diesel-electric engines to Cullumbers specifications. Upon completion of the engines, Cullumber has agreed to lease them for a period of 10 years and to assume all costs and risks of ownership. The lease is noncancelable, becomes effective on January 1, 2017, and requires annual rental payments of $395,894 each January 1, starting January 1, 2017. Cullumbers incremental borrowing rate is 9%. The implicit interest rate used by Riverbed Inc. and known to Cullumber is 8%. The total cost of building the three engines is $2,443,000. The economic life of the engines is estimated to be 10 years, with residual value set at zero. Cullumber depreciates similar equipment on a straight-line basis. At the end of the lease, Cullumber assumes title to the engines. Collectibility of the lease payments is reasonably certain; no uncertainties exist relative to unreimbursable lessor costs.

Prepare the journal entry or entries to record the transaction on January 1, 2017, on the books of Cullumber Industries.

Prepare the journal entry or entries to record the transaction on January 1, 2017, on the books of Riverbed Inc.