Blue Co. recorded a right-of-use asset of $100,000 in a 10-year operating lease. Payments of $16,275 are made annually at the end of each year. The interest rate charged by the lessor was 10%. The balance in the right-of-use asset after two years will be:

Answer: $86,822.50

Explanation:

GIVEN the following;

Right-of-use asset = $100,000

Annual payment = $16,275

Interest rate = 10% = 0.1

Calculate the balance in the Right-of-use asset after two years:

We calculate the amortization expense for YEAR 1 and YEAR 2, and deduct each year's amortization expense from the Right-of-use asset balance

Amortization expense = (Annual payment - interest on Right-of-use asset balance)

Right-of-use asset balance = $100,000

FIRST YEAR:

10% * $100,000 = $10,000

Annual payment = $16,275

Amortization expense = $ (16,275 - $10,000) = $6,275

Right-of-use asset balance after first year = $100,000 - $6,275 = $93,725

YEAR 2:

10% * $93,725 = $9,372.50

Annual payment = $16,275

Amortization expense = $ (16,275 - 9,372.50) = $6,902.50

Right-of-use asset balance after second year = $93,725 - $6,902.50 = $86, 822.50