On December 31, Year One, Ames leases equipment under a capital lease for 10 years with annual payments of $50,000 beginning immediately. The present value of an annuity due for 10 years at a reasonable interest rate of 12 percent is $350,000. The straight-line method of depreciation is to be used for the equipment but the effective rate method is applied for interest recognition. The asset must be returned to the owner after 10 years. Currently, the December 31, Year Two balance sheet is being prepared.

By how much has the net liability been reduced from that amount which appeared on the December 31, Year One balance sheet