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