CHAPTER 63 LEASEHOLD IMPROVEMENT Problem 63-1 (AICPA Adapted) On January 1, 2017, 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, 2024. During January 2019, 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; 2019, the entity’s intention as to exercise of the renewal option is uncertain. What amount should be recorded as depreciation of leasehold improvernent for 2019? a. 300,000 : b. 360,000 c. 450,000 d. 600,000 Solution 63-1 Answerd ~ (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. . 752 ‘eeProblem 63-2 (AICPA Adapted) igne eight-year lease for On January 1, 2019, Ames Company signed an eight-year is¢ office space. The entity has the option to renew the lease for an additional four-year period on or before January 1, 2026. During January 2019, the entity incurred the following costs: * P1,200,000 for general improvement to the leased premises with an estimated usefil life of ten years. * — P500,000 for office furniture and equipment with an estimated usefill life often years. * P400,000 for moveable assembly line equipment with usefiul life of S years. On December 31, 2019, the entity’s intention as to exercise of the renewal option is uncertain. Whiat is the accumulated depreciation of leasehold improvement on December 31, 2019? a. 292,500 b. 150,000 c. 170,000 d. 212,500 Solution 63-2 Answer b Accumulated depreciation — December 31, 2019 (1,200,000/8) _150,000 The leasehold improvement is depreciated over the lease term of 8 years because 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 equipment are not considered leasehold improvement. 1 753Problem 63-3 (AICPA Adapted) On January 1, 2019, 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 2019, 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 amount should be recorded as depreciation of leasehold improvements for 2019? a. 70,000 b. 89,000 c. 122,000 d. 140,000 Solution 63-3 Answer d Sales office (470,000 / 10) 47,000 Warehouse (750,000 / 10) 75,000 Parking lot (180,000 / 10) ° 18,000 Total ‘ 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. 784Problem 63-4 (AICPA Adapted) . On January 1, 2017, Nobb Company signed a ‘12-year lease for warehouse space. The entity has an option to renew the lease for an additional 8-year period on or before January 1, 2021. During January 2019, the entity made substantial improvement to the warehouse. The cdst of the improvement was P540,000 with an estimated useful life of 15 years. On December 31, 2019, the entity intended to exercise the renewal option. On December 31,2019, what is the carrying amount of the leasehold improvement? a. 486,000 b. 504,000 c, 510,000 d. 513,000 : Solution 63-4 Answer b Original lease 12 years Extension _8 Total life 20 Years expired (2017 and 2018) e (@2) Remaining lease term . ‘ _18 years Life of improvement (shorter) “#15, Leasehold improvement ' 540,000 Depreciation for 2019 (540,000 / 15) (36,000) Carrying amount — December 31, 2019 504,000 The renewal option is considered in determining the lease term because it is already. certain on December 31, 2019. At current year-end, the entity already intended to exercise the renewal option. 785Problem 63-5 (AICPA Adapted) Star Company leased .a building to be used as product showroom. The ten-year nonrenewable lease will expire on December 31, 2024. In January 2019, the entity redecorated the showroom and made leasehold improvement of P480,000. The estimated useful life of the improvement is 8 years. The ome line method of depreciation is used. What is the carrying amount of leasehold improvement on June 30, 2019? a. 456,000 b. 450,000 c. 440,000 d. 432,000 Solution 63-5 Answer c Leasehold improvement 480,000, Depreciation from January 1 to June 30, 2019 : (480,000 / 6 x 6/12) 40,000) Carrying amount ~ June 30, 2019 3 , 440,000 The remaining lease term from January 1, 2019 to December 3 1, 2024 .. is 6 years which is shorter than the life of the i improvement of 8 years. 756‘Problem 63-6 (AICPA Adapted) On January 1, 2019, Bay Company acquired a land lease for 21 years with no option fo renew. The lease required the lessee to construct a building in lieu of rent. The building was completed on December 31,2019 ata 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 is P2,400,000. The.useful life of the building is 25 years. ‘ What is the carrying amount of the building on December 31, 2020? "7,980,000 8,064,000 8,160,000 8,100,000 Rese Solution 63-6 Answer a Building — December 31, 2019 8,400,000 Depreciation for 2020 (8,400,000 / 20) * (420,000) Carrying amount — December 31, 2020 7,980,000 The building was completed on December 31, 2019, one year from the date of the lease on January 1, 2019. 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 depreciation because legally, the building becomes the property of the lessor when the contract is terminated. 157