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Financial Accounting Reviewer - Chapter 66

The document contains several problems related to accounting for leasehold improvements. It provides examples of lease terms and costs of improvements. It then asks questions to calculate depreciation amounts or carrying values of the improvements based on the lease terms and useful lives. The solutions explain how to determine the shorter of the lease term or useful life and whether to consider renewal options in the calculation.

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2K views5 pages

Financial Accounting Reviewer - Chapter 66

The document contains several problems related to accounting for leasehold improvements. It provides examples of lease terms and costs of improvements. It then asks questions to calculate depreciation amounts or carrying values of the improvements based on the lease terms and useful lives. The solutions explain how to determine the shorter of the lease term or useful life and whether to consider renewal options in the calculation.

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© © All Rights Reserved
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CHAPTER 66

LEASEHOLD IMPROVEMENT

Problem 66-1 (AICPA Adapted)


On January 1, 2016, Wayne Company signed an eight-year lease for office space. The entity has
the option to renew the lease for an additional four-year period on or before January 1, 2023.

During January 2018, two years after occupying the leased premises, the entity made general
improvement costing P3,600,000 and having a useful life of ten years.

On December 31, 2018, the entity's intention as to exercise of the renewal option is uncertain.

What is the depreciation of leasehold improvement for 2018?

a. 300,000
b. 360,000
c. 450,000
d. 600,000

Solution 66-1 Answer d (3,600,000/6) 600,000

The leasehold improvement is depreciated over the remaining lease term of 6 years and the life
of the improvement of 10 years, whichever is shorter.

The renewal option is ignored in determining the lease term because the option is uncertain.

Problem 66-2 (AICPA Adapted)


On January 1, 2018, Ames Company signed an eight-year lease for office space. The entity has the
option to renew the lease for an additional four-year period on or before January 1, 2025.
During January 2018, the entity incurred the following costs:

 P1,200,000 for general improvement to the leased premises with an estimated useful
life of ten years.
 P500,000 for office furniture and equipment with an estimated useful life of ten years.
 P400,000 for moveable assembly line equipment with useful life of 5 years.

On December 31, 2018, the entity's intention as to exercise of the renewal option is uncertain.
What is the accumulated depreciation of leasehold improvement on December 31, 2018?
a. 292,500
b. 150,000
c. 170,000
d. 212,500

Solution 66-2 Answer b


Accumulated depreciation - December 31, 2018 (1,200,000/8) 150,000

The leasehold improvement is depreciated over the lease term of 8 cause it is shorter than the
10-year useful life of the improvement.

The renewal option is ignored in determining the lease term because the option is uncertain.

The office furniture and equipment and the moveable assembly line ent are not considered
leasehold improvement.

Problem 66-3 (AICPA Adapted)


On January 1, 2018, Ral Company leased land and building from an unrelated lessor for a ten-
year term.

The lease has a renewal option for an additional ten years, but the entity has not reached a
decision with regard to the renewal option.

In early January of 2018, the entity completed the following improvements to the property:

Sales office 10 years 470,000


Warehouse 25 years 750,000
Parking lot 15 years 180,000

What is the depreciation of leasehold improvements for 2018?


a. 70,000
b. 89,000
c. 122,000
d. 140,000
Solution 66-3 Answer d
Sales office (470,000/10) 47,000
Warehouse (750,000 / 10) 75,000
Parking lot (180,000/10) 18,000
Total 140,000

Leasehold improvements should be depreciated over the life of the improvement or the lease
term, whichever is shorter.

The renewal option is uncertain because the entity has not reached a decision with regard to the
renewal option.

Thus, the renewal option is ignored in determining the lease term.

Problem 66-4 (AICPA Adapted)


On January 1, 2016, Nobb Company warehouse space. The entity has an additional 8-year period
on or before January 1, 2020.

During January 2018, the entity made substantial improvement to the warehouse. The cost of
the improvement was P540,000 with an estimated useful life of 15 years.

On December 31, 2018, the entity intended to exercise the renewal option.

On December 31, 2018, what is the carrying amount of the leasehold improvement?
a. 486,000
b. 504,000
c. 510,000
d. 513,000

Solution 66-4 Answer b


Original lease 12 years
Extension 8
Total life 20
Years expired (2016 and 2017) (2)
Remaining lease term 18 years

Life of improvement (shorter) 15


Leasehold improvement 540,000
Depreciation for 2018 (540,000/15) (36,000)

Carrying amount - December 31, 2018 504,000

The renewal option is considered in determining the lease term it is already certain on December
31, 2018.

At current year-end, the entity already intended to exercise renewal option.

Problem 66-5(AICPA Adapted)

Star Company leased a building to be used as product showroom. The ten-year nonrenewable
lease will expire on December 31, 2023.

In January 2018, the entity redecorated the showroom and made leasehold improvement of
P480,000.

The estimated useful life of the improvement is 8 years. The straight line method of depreciation
is used.

What is the carrying amount of leasehold improvement on June 30, 2018?


a. 456,000
b. 450,000
c. 440,000
d. 432,000

Solution 66-5 Answer c


Leasehold improvement 480,000
Depreciation from January 1 to June 30, 2018
(480,000/ 6 x 6/12) (40,000)
Carrying amount – June 30, 2018 440,000

The remaining lease term from January 1, 2018 to December 31, 2023 is 6 years which is shorter
than the life of the improvement of 8 years.
Problem 66-6 (AICPA Adapted)
On January 1, 2018, Bay Company years with no option to renew. The lease required the lessee
to construct a building in lieu of rent.

The building was completed on December 31,2018 at a cost of P8,400,000 and depreciated using
the straight line method.

At the end of the lease, the estimated fair value of the building P2,400,000. The useful life of the
building is 25 years.

What is the carrying amount of the building on December 31,2019?


a. 7,980,000
b. 8,064,000
c. 8,160,000
d. 8,100,000

Solution 66-6 Answer a


Building - December 31, 2018 8,400,000
Depreciation for 2019 (8,400,000/20) (420,000)
Carrying amount - December 31, 2019 7,980,000

The building was completed on December 31, 2018, one year from the date of the lease on
January 1, 2018.

Thus, the remaining lease term is 20 years which is shorter than the life of the building of 25
years.

The estimated fair value of the building at the end of the lease is ignored in computing
depreciate because legally, the building becomes the property of the lessor when the contract is
terminated.

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