Question

American Movieplex, a large movie theater chain, leases most of its theater facilities. In conjunction with recent operating leases, the company spent $28 million for seat and carpeting. The question being discussed over breakfast on Wednesday morning was the length of the depreciation period for these leasehold improvements. The company controller, Sarah Keene, was surprised by the suggestion of Larry Person, her new assistant. Keene: Why 25 years? We've never depreciated leasehold improvements for such a long period. Person: I noticed that in my review of back records. But during our expansion to the Midwest, we don't need expenses to be any higher than necessary. Keene: But isn't that a pretty rosy estimate of these assets' actual life? Trade publications show an average depreciation period of 12 years. Read through the dilemma.

For the Original Post*, you will be arguing in favor of Larry Person's proposal to increase the depreciation period for leasehold improvements. Remember to use logic and the accounting principles you have learned thus far to develop your argument. You must include at least three points as to why this route is the best route to go (with one of those points being related to the learned accounting principles).

Answer 1

Larry Person wants to depreciate the leasehold improvements up to a period of 25 years. She states that expenses must not be stated higher than necessary.

So let's see a few more arguments which Person can give to Keene to support her 25 years depreciation point:

1) Going Concern: As per one of the famous accounting principle of going concern, which says business will remain in operation for the foreseeable future. So it means that it would be justified to defer the recognition of some expenses till later period.

2) Higher profits: If the leasehold will be depreciated for the period of 25 years. Then we will be able to show more profits in our books of accounts. It will help us in brand imaging of our business.

3) Maintenance cost: Seats and carpets have a higher maintenance cost. So we have to keep incurring expenses to keep them in good condition. Over and above this maintenance cost if we charge higher depreciation then we will be understating our profits.

The above reasons clearly indicate that the lease hold improvements must be depreciated over a period of 25 years.