25. XYZ Company leased equipment to West Corporation under a lease agreement that qualifies as a finance lease to West but not as a result of a bargain purchase option or a title transfer. The present value of the lease payments is $600,000. The expected economic life of the asset is seven years. The lease term is six years. Using the straight-line method, the balance in the right-of-use asset after two years will be

The balance in right-of-use asset after two years using straight-line method is $428,571.

Explanation:

Right-of-use asset is simply the lessee's right to the use of leased asset under the agreed terms. The term came into being as a result of IFRS 16 Leases, which replaced IAS 17.

Using straight-line method, depreciation expense is calculated as (Cost - Residual Value) / No of useful life

The economic life of the asset is what we would use as the useful life and not the lease term since that approximates the useful life of the asset.

Therefore, depreciation = ($600,000 - 0) / 7 years = $85,714 yearly

Accumulated depreciation for 2 years is $85,714 x 2 = $171,429 approximately

Therefore, the balance (net book value) in the right-of-use asset after two years will be $600,000 - $171,429 = $428,571

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