Oak Co. leased equipment for its entire nine-year useful life, agreeing to pay $50,000 at the start of the lease term on December 31, 2006, and $50,000 annually on each December 31 for the next eight years. The present value on December 31, 2006, of the nine lease payments over the lease term, using the rate implicit in the lease which Oak knows to be 10%, was $316,500. The December 31, 2006 present value of the lease payments using Oak’s incremental borrowing rate of 12% was $298,500. Oak made a timely second lease payment. What amount should Oak report as capital lease liability in its December 31, 2007 balance sheet?

  1. $350,000
  2. $243,150
  3. $228,320
  4. $0