How to Record Expenses for Improvements on Leased Office Space
What journal entry would be needed to record the expense for the first year related to the improvements?
The main journal entry needed for the first year would be to debit Leasehold Improvement Expense for $12,500 and credit Accumulated Amortization on Leasehold Improvements for $12,500.
Answer:
The improvements on the leased office space incurred by Crestfield amount to $25,000 and are expected to yield benefits for 4 years. However, Crestfield has only 2 years remaining on its lease. To record the expense related to these improvements, you need to amortize the cost over the 2-year lease period instead of the 4-year useful life. To do this, you will divide the total cost of the improvements ($25,000) by the remaining lease term (2 years), which gives you an annual expense of $12,500. Thus, the journal entry for the first year is to debit Leasehold Improvement Expense for $12,500 and credit Accumulated Amortization on Leasehold Improvements for $12,500.
Leasehold improvements are important expenses for businesses that lease office space. When a company incurs costs to enhance the leased office space, these expenses need to be recorded accurately in the financial statements. In the case of Crestfield, the $25,000 spent on improvements is amortized over the remaining lease term to reflect the economic benefits received from these enhancements.
By recording the expense for the first year related to the improvements, Crestfield is aligning its financial reporting with the actual benefit period of the leasehold improvements. This practice ensures that the company's financial statements reflect the true cost of using the improved office space and comply with accounting standards.
It is essential for businesses to carefully track and report leasehold improvement expenses to provide a clear picture of their financial performance and obligations. Properly recording these expenses also helps in strategic decision-making and budgeting for future lease arrangements.