On January 1. year 1, Bodrum Inc leased equipment from Home Construction Company under a four-year lease requiring equal annual payments of $86,038 on payment due on January 1, year 1. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 4 year useful life and no salvage value. Bodrum incremental borrowing rate is 12% and the rate implicit in the lease (which is known by Bodrum Inc) is 10%. Assuming that this lease is property classified as a finance lease by Bodrum, what is the amount of reduction in lease liability recorded when the second lease payment is made in Year 2?

PV annuity due. PV ordinary annuity

12%, 4 periods. 3.40183. 3.03735

10%, 4 periods. 3.48685 3.16986

A. $86,038

B. $56,038

C. $64,642

D. $68,300

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