Warren Co. recorded a right-of-use asset of $800,000 in a 10-year lease under which no profit was recorded at commencement by the lessor. The interest rate charged the lessee was 10%. Under the new ASU, the balance in the right-of-use asset after two years will be:
A)$648,000.
B)$640,000.
C)$880,000.
D)$968,000.

Question

Quizplus · Accepted Answer

Using the straight-line method, the lease liability will be $800,000/10 = $80,000 per year. 
After 2 years, the remaining lease liability will be $80,000 x 8 = $640,000.
To calculate the right-of-use asset, we need to determine the present value of the remaining lease payments.
Year 1 lease payment = $80,000
Year 2 lease payment = $80,000
PV of Year 1 lease payment = $80,000 / (1.10)^1 = $72,727.27
PV of Year 2 lease payment = $80,000 / (1.10)^2 = $66,115.70
Total present value of remaining lease payments = $72,727.27 + $66,115.70 = $138,842.97
Therefore, the balance in the right-of-use asset after two years will be $800,000 - $138,842.97 = $661,157.03, which rounds down to $640,000.

Warren Co Recorded a Right-Of-Use Asset of $800,000 in a 10-Year