Question

On January 1 of this year, Diaz Boutique pays $105,000 to modernize its store. Improvements include new floors, ceilings, wiring, and wall coverings. These improvements are estimated to yield benefits for 10 years. Diaz leases (does not own) its store and has eight years remaining on the lease.
Prepare the journal entry to record the cost of modernization. Record the cost of modernization of the store for $105,000 cash.

Answer 1

Answer:

See the explanation below:

Explanation:

Since the store is not owned by Diaz Boutique but it is still under lease for 8 years, Diaz Boutique will amortize the modernization over the remaining 8 years of the lease as follows:

Annual amortization = $105,000 ÷ 8 = $13,125  

The journal entries for year 1 will be as follows:

Detail                                                       Dr ($)                 Cr ($)

Store modernization                          $105,000

Cash                                                                               $105,000

Being the amount of cash paid to modernize the leased store          

Amortization expenses                          13,125

Accumulated amortization                                                 13,125  

Being the amortization of the cost of store modernization for Year 1      

Answer 2

Answer:

Debit Asset Improvement account $105,000

Credit Cash account $105,000

Being entries to record cost of modernization of store.

Explanation:

The cost of the modernization is a cost that will be capitalized with the cost of the store as an asset. When an asset is purchased for cash, the adjusting entries required are;

Debit Fixed asset account

Credit Cash account

The modernization will be recognized in the Asset improvements account hence the debit entry will be posted there while the corresponding credit will go to cash account.