On December 31, year 1, Day Co. leased a new machine

from Parr with the following pertinent information:

Lease term 8 years

Annual rental payable at beginning of each year $60,000

Useful life of machine 10 years

Day’s incremental borrowing rate 15%

Implicit interest rate in lease (known by Day) 12%

The lease is not renewable, and the machine reverts to Parr at the termination of the lease. The cost of the machine on Parr’s accounting records is $425,000.

Required:

At the beginning of the lease term, what should Day record as a lease liability?

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