On December 31, 2017, Day Company leased a new machine from Parr with the following pertinent information:

Lease term.............................................................................................5 years

Annual rental payable on December 31 (beginning December 31, 2017)...................$50,000

Useful life of machine...............................................................................8 years

Day's incremental borrowing rate.....................................................................15%

Implicit interest rate in lease (known by Day)......................................................11%

The lease is not renewable, and the machine reverts to Parr at the termination of the lease. The cost of the machine on Parr's accounting records is $375,500. Day early-adopted ASU 2016-02.

Required:

1. Explain whether the lease will be an operating lease or a finance lease under ASU 2016-02.

2. Compute the amount of Day's lease liability at the beginning of the lease term under ASU 2016-02 assuming that the first payment has been made.