Question

Durney Co. recorded a right-of-use asset of $610,000 in a ten-year finance lease. The interest rate charged by the lessor was 10%. The balance in the right-of-use asset after two years will be:

A) $968,000
B) $880,000
C) $648,000
D) $640,000

Answer 1

Without sufficient details regarding lease payments and amortization schedule, we cannot determine the balance of the right-of-use asset after two years. Accurate calculation requires total lease liability, yearly interest expense, and amortization amount, which subtracts interest from lease payments.

Step-by-step explanation:

The student's question deals with the calculation of the balance in the right-of-use asset after two years for a finance lease with an initial value of $610,000 and an interest rate of 10% from the lessor. This scenario involves accounting principles, particularly those related to leasing under accounting standards such as IFRS 16 or ASC 842 which are relevant to identifying, measuring, and reporting leases in financial statements. To answer the question, one would need to calculate the amortization of the right-of-use asset over the lease term, taking into account the lease payments and interest.

However, because the student's question does not provide enough details regarding the lease payments and the amortization schedule, it is not possible to accurately determine the balance of the right-of-use asset after two years. The answer would typically involve determining the total lease liability, calculating the interest expense for each year, and reducing the right-of-use asset by the amortization amount, which would be the lease payment minus the interest expense for that year. Without the lease payment information, we can't perform the necessary calculations to arrive at the correct answer.

In a real-world scenario, the initial measurement of the right-of-use asset would include the present value of lease payments and any initial direct costs incurred by the lessee. Over time, the asset is typically reduced for amortization, and the lease liability is reduced as payments are made and increased for the accrual of interest.

Answer 2

The correct answer is D) $640,000.

To calculate the balance in the right-of-use asset after two years, we need to understand how the balance changes over time in a finance lease.

In a finance lease, the lessee records the right-of-use asset at the present value of lease payments, which is $610,000 in this case. The lease term is ten years, and the interest rate charged by the lessor is 10%.

To calculate the balance after two years, we need to calculate the lease payments for the first two years and subtract them from the initial balance.

First, let's calculate the lease payments. In a finance lease, the lease payments remain constant throughout the lease term. We can use the annuity formula to calculate the lease payments:

Lease Payment = Present Value of Lease Payments / Present Value Factor

The present value factor is calculated using the formula:

Present Value Factor = (1 - (1 + r)^(-n)) / r

where r is the interest rate and n is the number of periods.

Using the given values, we can calculate the lease payment:

Present Value Factor = (1 - (1 + 0.10)^(-10)) / 0.10
Present Value Factor = (1 - 0.386) / 0.10
Present Value Factor = 6.14

Lease Payment = $610,000 / 6.14
Lease Payment ≈ $99,351.39

Now, let's calculate the lease payments for the first two years:

Total Lease Payments = Lease Payment × Number of Years
Total Lease Payments = $99,351.39 × 2
Total Lease Payments = $198,702.78

Finally, let's calculate the balance after two years:

Balance after Two Years = Initial Balance - Total Lease Payments
Balance after Two Years = $610,000 - $198,702.78
Balance after Two Years ≈ $411,297.22