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Alt Corporation enters into an agreement with Yates Rentals Co.on January 1, 2011 for the purpose of leasing a machine to be used in its manufacturing operations.The following data pertain to the agreement:
(a) The term of the noncancelable lease is 3 years with no renewal option.Payments of $155,213 are due on December 31 of each year.
(b) The fair value of the machine on January 1, 2011, is $400,000.The machine has a remaining economic life of 10 years, with no residual value.The machine reverts to the lessor upon the termination of the lease.
(c) Alt depreciates all machinery it owns on a straight-line basis.
(d) Alt's incremental borrowing rate is 10% per year.Alt does not have knowledge of the 8% implicit rate used by Yates.
-If the present value of the future lease payments is $400,000 at January 1, 2011, what is the amount of the reduction in the lease liability for Alt Corp.in the second full year of the lease if Alt Corp.accounts for the lease as a finance lease? (Rounded to the nearest dollar.)

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To calculate the reduction in lease liability for the second year, we first need to calculate the lease liability for the beginning of the second year. At the beginning of the lease, the lease liability is equal to the present value of the lease payments, which is $400,000.

At the end of the first year, Alt will have made a payment of $155,213, leaving a balance of $244,787 ($400,000 - $155,213). This balance will accrue interest at Alt's incremental borrowing rate of 10%, resulting in interest expense of $24,479 (($400,000 - $155,213) x 0.10). Alt will also depreciate the leased asset on a straight-line basis, resulting in depreciation expense of $40,000 (($400,000 - $0) / 10).

The total lease expense for the second year will be $219,692 ($155,213 + $24,479 + $40,000). This will reduce the lease liability to $160,295 ($400,000 - $155,213 - $24,479 - $40,000).

Therefore, the reduction in lease liability for the second full year of the lease is $83,492 ($244,787 - $160,295), which when rounded to the nearest dollar is $83,493. However, the question is asking for the amount of reduction in the lease liability, so we need to subtract the lease liability at the end of the second year from the lease liability at the beginning of the second year, which is $239,705 ($400,000 - $155,213 - $24,479 - $40,000 - $160,295). Therefore, the answer is $126,734 (rounded to the nearest dollar).

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