Useit, Inc. leased equipment from Home Construction Company under a four-year lease requiring equal annual payments of $87,500, 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. Useit, Inc.'s incremental borrowing rate is 12% and the rate implicit in the lease (which is known by Useit, Inc.) is 10%. Assuming that this lease is properly classified as a finance lease by Useit, what is the amount of reduction in lease liability recorded when the second lease payment is made in Year 2?

PV Ordinary Annuity 3.03735 12%,4 3.16986 4,10%

PV Annuity Due

12%, 4 period 3.40183

10% 4 periods 3.48685

a) 64,642 b) 86,038

c) 63,862 d) 65,740