On January 1, Year 1, Garrett Enterprises manufactured a piece of equipment with a cost of $650,000 and a fair value of $825,000. On that date, Garrett Enterprises leases the asset to Sowell Company at fair value for a 4-year term at an interest rate of 8%. The annual lease payment is due at the beginning of each year, and the first payment is to be collected at the inception date.

The leased asset will revert back to Garrett Enterprises at the end of the lease term. The equipment has an estimated residual value of $55,000 which is not guaranteed by the lessee. The asset has an estimated useful life of 4 years. Both Garrett Enterprises and Sowell Company have a calendar-year reporting period.

2. Compute the amount of the annual lease payments to be collected by the lessor.