Sheridan, Inc. leased equipment from Tower Company under a 4-year lease requiring equal annual payments of $274152, with the first payment due at lease inception. 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. Sheridan, Inc.'s incremental borrowing rate is 9% and the rate implicit in the lease (which is known by Sheridan, Inc.) is 7%. Assuming that this lease is properly classified as a capital lease, what is the amount of principal reduction recorded when the second lease payment is made in Year 2?

PV Annuity Due PV Ordinary Annuity

7%, 4 periods 3.62432 3.38721

9%, 4 periods 3.53129 3.23972

Which one is the answer?

$223790

$274152

$185408

$209149