Phoenix Agency Lease Office Space and Improvement Expenses Calculation

What amount of expense should be recorded in the first year related to the improvements made by Phoenix Agency on their leased office space?

a) $7,700 b) $20,900 c) $18,260 d) $10,560

Answer:

$13,200 per year

Phoenix Agency leases office space for $7,700 per month. On January 3, Phoenix incurs $105,600 to improve the leased office space. These improvements are expected to yield benefits for 10 years. Phoenix has 8 years remaining on its lease.

Since the office space is not going to remain with Phoenix after the lease period, it means that the improvement expenses will be expensed over the remaining lease period, which is 8 years.

Therefore, the amount of expense that should be recorded in the first year related to the improvements can be calculated as:

= Amount incurred to improve the office space ÷ remaining life on its lease

= $105,600 ÷ 8

= $13,200 per year