Question

Red Co. recorded a right-of-use asset of $170,000 in a 10-year finance lease. Payments of $27,667 are made annually at the end of each year. The interest rate charged by the lessor and known by Red was 10%. The balance in the lease payable after two years will be

Answer 1

,Answer: $147,599.30

Explanation:

Lease payment = Interest component + Principal component

Year 1:

Interest = 10% * 170,000

= $17,000

Principal component = 27,667 - 17,000

= $10,667

Lease payable will drop to:

= Lease balance - Principal component

= 170,000 - 10,667

= $159,333

Year 2:

Interest = 10% * 159,333

= $15,933.30

Principal component = 27,667 - 15,933.30

= $11,733.70

Lease payable balance will drop to:

= 159,333 -11,733.70

= $147,599.30