On January 1, 2018, Green Co. recorded a right-of-use asset of $270,360 in an operating lease. The lease calls for ten annual payments of $40,000 at the beginning of each year. The interest rate charged by the lessor was 10%. The balance in the right-of-use asset at December 31, 2018, will be:

Question

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In an operating lease, the lessee amortizes its right of use asset at an amount so that the total of interest expense and amortization will be a straight-line amount equal to the annual payments, $40,000 per year. Interest the first year will be 10% × ($270,360 - 40,000) = $23,036. So, amortization will be $40,000 - 23,036 = $16,964. The year-end balance, then, will be $270,360 - 16,964 = $253,396.