Question
In: Accounting
In 2018, the company made improvement to leased office space in the amount of $46,978. At...
In 2018, the company made improvement to leased office space in the amount of $46,978. At that time, the remaining term on the lease was 7 years with renewals of 2 and 3 years.
In 2020, further improvements were made to the leased space in the amount of $68,094.
Calculate the maximum impact on business income from leasehold improvements.
Solutions
Expert Solution
A leasehold improvement is a change made to leasehold property in order to customize it according to one's needs. Leashehold improvements can be carried out by landlord in order to increase the marketability of property, alternatively it may be carried out by tenant himself when such change is essential for functioning of his business.
If material leasehold improvement is made by a tenant which result in long term benefits, such expenditure will be capitalized and amortized over the remaining term of lease. If the leasehold improvement is of non material nature or do not result in substantial improvement, such expenditure can be treated as revenue expenditure and write off in the same year.
In the present case, since the leasehold improvement made by company for its leasehold property is substantial, hence such value will be capitalized and shall be amortized over the reamining term of lease.
The financial impact of such leasehold improvement shall be as shown below-
| Year | Amount of leasehold improvement ($) | Maximum Remaining term of lease | Impact/year on business income | Total impact/year upto remaining lease term |
| 2018 | 46978 | 10* | 4698 | 4698 |
| 2020 | 68094 | 8 | 8512 | 13210 |
*Note: As the company have made substantial improvement to leasehold property, hence it is assumed that it will renew the lease for further period of 3years.
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