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Lease computations

Enro Tech Corporation is in the business of leasing new sophisticated satellite systems. As a lessor of satellites, Encotech purchased a new system on December 31, 2011. The system was delivered the same day (by prior arrangement) to Ocular Investment Company, a lessee. The corporation accountant revealed the following information relating to the lease transaction:

Cost of system to Enco Tech $840,000.00
Estimated useful life and lease term 6 years
Expected residual value (unguaranteed) $60,000.00
Enco Tech's implicit rate of interest 12%
Ocular's incremental borrowing rate 14%
Date of first lease payment Dec. 31, 2011

Additional information is as follows:

a) At the end of the lease, the system will revert to Enco Tech.
b) Ocular is aware of Enco Tech's rate of implicit interest.
c) The lease rental consists of equal annual payments.
d) Encotech accounts for leases using the direct financing method. Ocular 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 Encotech should recognize at the inception of the lease.
3. What are the total expenses related to the lease that Ocular should record for the year ended December 31, 2012.

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Solution Summary

Lease computations for Enro Tech Corporation are examined. The equal annual payments for lease rental rates are determined.

$2.19