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Blue Co. recorded a right-of-use asset of $210,000 in a 10-year operating lease. Payments of $37,167 are made annually at the end of each year. The interest rate charged by the lessor was 12% and was known by Blue. The balance in the right-of-use asset after two years will be:

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Answer:

The balance in the right-of-use asset after two years will be $184,629.96.

Explanation:

This can be calculated as follows:

First year interest = Cost of the right-of-use asset * Interest rate = $210,000 * $12% = $25,200

Principal paid in the first year = Annual payment - First year interest = $37,167 - $25,200 = $11,967

Balance in the right-of-use asset after one year = Cost of the right-of-use asset - Principal paid in the first year = $210,000 - $11,967 = $198,033

Second year interest = Balance in the right-of-use asset after one year * Interest rate = $198,033 * $12% = $23,763.96

Principal paid in the second year = Annual payment - Second year interest = $37,167 - $23,763.96 = $13,403.04

Balance in the right-of-use asset after two years = Balance of the right-of-use asset after one year - Principal paid in the second year = $198,033 - $13,403.04 = $184,629.96

Therefore, the balance in the right-of-use asset after two years will be $184,629.96.

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