On January 1, 2006, Day Corp. entered into a ten-year lease agreement with Ward, Inc. for industrial equipment. Annual lease payments of $10,000 are payable at the end of each year. Day knows that the lessor expects a 10% return on the lease. Day has a 12% incremental borrowing rate. The equipment is expected to have an estimated useful life of ten years. In addition, a third party has guaranteed to pay Ward a residual value of $5,000 at the end of the lease.

The present value of an ordinary annuity of $1 at

12% for ten years is 5.6502

10% for ten years is 6.1446

The present value of $1 at

12% for ten years is .3220

10% for ten years is .3855

In Day’s October 31, 2006 balance sheet, the principal amount of the lease obligation was

  1. $63,374
  2. $61,446
  3. $58,112
  4. $56,502