Uhrhan, Inc.'s Leasehold Improvements and Amortization Calculation

How should Uhrhan, Inc. record the amortization of leasehold improvements for 2020?

At December 31, 2020, Uhrhan, Inc.'s intentions regarding the exercise of the renewal option are uncertain. Given this scenario, what is the appropriate way for Uhrhan, Inc. to handle the amortization of leasehold improvements for the current year?

Final Answer:

Uhrhan, Inc. should record the annual amortization of the leasehold improvements for 2020 at $60,000. This is based on the remaining term of the current lease, following GAAP rules for amortization of leasehold improvements.

Explanation:

Uhrhan, Inc. should record the amortization of leasehold improvements for 2020 based on the remaining term of the initial leasing period, not the potential renewal period. The improvements, which cost $360,000 and have an estimated useful life of 10 years, were made after 2 years of the lease had already elapsed. With 6 years remaining on the initial lease term, the annual amortization for 2020 would be $60,000 ($360,000 divided by 6).

It's important to note that the decision to amortize the improvements over the remaining term of the initial lease rather than the potential renewal period is influenced by the uncertainty surrounding Uhrhan, Inc.'s intentions regarding the lease renewal. In accordance with Generally Accepted Accounting Principles (GAAP), leasehold improvements are typically amortized over the shorter of the lease term or the estimated useful life of the improvements.