Leasehold Improvement Expense Calculation

What is leasehold improvement?

Leasehold improvement is a capital expenditure incurred to improve the condition of an asset that has been leased from a third party.

Compute the amount of expense that should be recorded the first year related to the improvements.

Monte Ray leases office space for $7,000 per month. On January 3, Monte Ray incurs $75,000 to improve his leased office space. These improvements are expected to yield benefits for 8 years. Ray has 6 years remaining on his lease. What amount of expense should be recorded the first year related to the improvements?

A. $19,500.

B. $7,000.

C. $12,500.

D. $9,375.

E. $16,375.

Answer:

The expense in the first year relating to the improvements is $12,500

In this case, a leasehold improvement costing $75,000 was incurred and the lease period has only 6 years remaining, whereas the improvement would provide benefits for 8 years. To calculate the first year expense related to the improvements, we need to use the straight-line depreciation method.

The first year depreciation can be calculated as follows:

First year depreciation = Improvement cost / Useful life

First year depreciation = $75,000 / 6

First year depreciation = $12,500

It is important to note that the first year expense only relates to improvements, and the lease expense should be ignored in this calculation. By using the lower of the remaining lease period and the years of benefits, we determine the depreciation expense for the first year.