Leasehold Improvements Accounting: Crestfield's Office Space Upgrades

What accounting entries are needed to record Crestfield's office space improvements?

On January 3, Crestfield incurs $22,000 to improve the leased office space, expected to benefit for 20 years with 10 years remaining on the lease. What journal entry should be made for the first year related to these improvements?

Answer:

To record the $22,000 office space improvements, Crestfield should classify it as a leasehold improvement expense. The cost should be amortized over the remaining term of the lease, not the life of the improvement. The first-year expense will be $2,200.

The journal entry to record this expense in the first year would be:

Debit Leasehold Improvement Expense $2,200

Credit Accumulated Amortization for Leasehold Improvements $2,200

Explanation:

Leasehold improvements refer to enhancements made by a lessee to leased property that provide benefits over time. When Crestfield spent $22,000 on office space improvements expected to last 20 years but only has a 10-year lease, the expense should be amortized over the remaining lease term.

For the first year, Crestfield should recognize a $2,200 expense in its financial records. This ensures accurate reporting of the company's financial standing and the proper treatment of leasehold improvements on the balance sheet.