Accounting for Leasehold Improvements: A Reflective Analysis

How should Crestfield record the expenses related to the improvements on the leased office space?

Given Crestfield has 4 years remaining on its lease, how can they appropriately account for the expense of the improvements made?

Answer:

Debit Amortization Expense $3,000; credit Accumulated Amortization $3,000.

Explanation:

In the case of Crestfield, the company made improvements on the leased office space that are expected to benefit them for 10 years, even though their lease only covers 4 years. To properly record this expense, Crestfield needs to evenly distribute the total improvement cost over the remaining years of their lease.

Therefore, the annual expense related to these improvements will be $12,000 divided by 4, which equals to $3,000 per year. The journal entry needed would be:

  • Debit Leasehold Improvements Expense: $3,000
  • Credit Cash or Accounts Payable (depending on how the improvements were paid): $3,000
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