Question

Phoenix Agency leases office space. On January 3, Phoenix incurs $66,500 to improve the leased office space. These improvements are expected to yield benefits for 7 years. Phoenix has 5 years remaining on its lease. Compute the amount of expense that should be recorded the first year related to the improvements.

Answer 1

Answer:

$13,300

Explanation:

The cost of improvement should be depreciation over the lower of - remaining lease term or estimated useful life of improvement .

In our case, the lease number of years is shorter than the estimated life of improvement.

So, the cost will be depreciation for 5 years.

Hence, the amount to be recorded for first year:

= cost for improving leased office space ÷ Years remaining on lease

= 66,500 ÷ 5

= $13,300

Therefore, the amount of expense that should be recorded the first year related to the improvements is $13,300.