Phoenix Agency Improvements Cost Expense Calculation
How much expense should be recorded the first year related to the improvements made by Phoenix Agency?
A. $8,125
B. $13,000
C. $6,000
D. $65,000
E. $20,000
Answer:
correct option is $13,000
Explanation:
Phoenix Agency leases office space for $7,000 per month. On January 3, Phoenix incurs $65,000 to improve the leased office space. These improvements are expected to yield benefits for 8 years. Phoenix has 5 years remaining on its lease.
Given the data, we need to calculate the amount of expense that should be recorded the first year related to the improvements.
Annual depreciation of Leasehold Improvement can be calculated as follows:
We know that the cost of leasehold improvement is depreciated over the remaining lease term or the estimated useful life of the improvement, whichever is less.
Annual depreciation of Leasehold Improvement = $65,000 / 5 years
Annual depreciation of Leasehold Improvement = $13,000
Therefore, the correct amount of expense that should be recorded the first year related to the improvements is $13,000.
Phoenix Agency's decision to improve their leased office space for $65,000 shows a commitment to enhancing their working environment. By spreading out the expense over the remaining lease term, Phoenix can accurately reflect the cost of the improvements in their financial statements.
The annual depreciation of $13,000 allows Phoenix to gradually expense the improvements over time, matching the cost with the benefits received. This approach ensures that Phoenix's financial statements accurately represent the impact of the improvements on their business.
Overall, this calculation highlights the importance of accurately accounting for leasehold improvements to provide a true reflection of a company's financial performance and commitment to enhancing their facilities.