Pinnacle Controls Corporation is in the business of leasing new sophisticated satellite systems.

As a lessor of satellites, Pinnacle Controls purchased a new system on December 31, 2008. The system was delivered the same day (by prior arrangement) to Kerry Investment Company, a lessee. The corporation accountant revealed the following information relating to the lease transaction:

Cost of system to Pinnacle Controls . . . . . . . . . . . . . . . . . . . . . $630,000

Estimated useful life and lease term . . . . . . . . . . . . . . . . . . . . . . . 7 years

Expected residual value (unguaranteed) . . . . . . . . . . . . . . . . . . . $35,000

Pinnacle Controls’ implicit rate of interest . . . . . . . . . . . . . . . . . . . . 11%

Kerry’s incremental borrowing rate . . . . . . . . . . . . . . . . . . . . . . . . . . 13%

Date of first lease payment . . . . . . . . . . . . . . . . . . . . . . . . . Dec. 31, 2008

Additional information is as follows:

(a) At the end of the lease, the system will revert to Pinnacle Controls.

(b) Kerry is aware of Pinnacle Controls’ rate of implicit interest.

(c) The lease rental consists of equal annual payments.

(d) Pinnacle Controls accounts for leases using the direct financing method. Kerry intends to record the lease as a capital lease. Both the lessee and the lessor report on a calendar- year basis and elect to depreciate all assets on the straight-line basis.

Instructions:

1. Compute the annual lease payment under the lease. (Round to the nearest dollar.)

2. Compute the amounts of the lease payments receivable that Pinnacle Controls should recognize at the inception of the lease.

3. What are the total expenses related to the lease that Kerry should record for the year ended December 31, 2009?