Question

Crestfield leases office space. On January 3, the company incurs $22,000 to improve the leased office space. These improvements are expected to yield benefits for 20 years. Crestfield has 10 years remaining on its lease. What journal entry would be needed to record the expense for the first year related to the improvements?

Answer 1

Answer:

Journal 1

Office Improvements $22,000 (debit)

Cash $22,000 (credit)

Being recognition of the Capital expenditure

Journal 2

Depreciation expense $ 2,200 (debit)

Accumulated Depreciation - Office Improvements $ 2,200 (credit)

Being Using the 10 years remaining on its lease to depreciate the lease

Explanation:

The improvements to leased offices are of a Capital Nature. Thus thus is a capital expenditure not a revenue expenditure.

Any improvements made on the leased property belongs to the lessor and thus the lessee will still be bound by the lease period.

In the year of improvements the journals are as follows

Office Improvements $22,000 (debit)

Cash $22,000 (credit)

Being recognition of the Capital expenditure

A journal to record the depreciation also need to be effected

Depreciation expense $ 2,200 (debit)

Accumulated Depreciation - Office Improvements $ 2,200 (credit)

Being Using the 10 years remaining on its lease to depreciate the lease