Leasehold improvement – depreciable amount

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  • #187539
    krokofilen
    Member

    Hey

    I don’t get this one. I thought the depreciable amount would always be (purchase price – salvage value), also for leasehold improvements. The Becker book doesn’t say much on this topic, but the following NINJA MCQ made me wonder if I have the wrong understanding of this.

    On January 1, 20X1, Bay Co. acquired a land lease for a 21-year period with no option to renew. The lease required Bay to construct a building in lieu of rent. The building, completed on January 1, 20X2, at a cost of $840,000, will be depreciated using the straight-line method. At the end of the lease, the building’s estimated market value will be $420,000. What is the building’s carrying amount in Bay’s December 31, 20X2, balance sheet?

    A.

    $798,000

    B.

    $800,000

    Incorrect C.

    $819,000

    D.

    $820,000

    Answer goes:

    This building is treated as a leasehold improvement. Although the land lease is for 21 years, the building will be in use for 20 years; thus, the depreciation period for the building is 20 years:

    Cost / Life = $840,000 / 20 years = $42,000/year

    Building cost – Depreciation = Carrying Value of Building

    $840,000 – $42,000 = $798,000

    My calculation was:

    (840,000 – 420,000) / 20 years = $21,000/year

    Building cost – Depreciation = Carrying Value of Building

    $840,000 – $21,000 = $819,000

    Big 4 Audit Manager from Europe here to pass the CPA in the U.S. of A in 2014! Niiice!

    AUD - 95 / Jul 15 / 130h over 4 weeks
    FAR - 86 / Aug 14 / 240h over 4 weeks
    (11 week break)

    REG - 81 / Nov 14 / 200h over 4 weeks
    BEC - 87 / Nov 17 / 30 h over 2.5 days

Viewing 7 replies - 1 through 7 (of 7 total)
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  • #584917
    UHC2005
    Member

    The only thing that sticks out to me is that the $420,000 isn't necessarily designated as “salvage”, but as the estimated market value.

    Using Ninja MCQ, NINJA Notes, Audio, Flashcards and BLITZ, and 2014 Wiley Text

    FAR - (61,63)
    AUD - (68)

    Keep Calm and RTMFQ

    Accountant, what is best in life? To crush your MCQs, see them driven before you, and hear the lamentation of their SIMS!

    #584918
    mla1169
    Participant

    The value of the rent is $840,000 since the lessee has no opportunity to recover the $420k estimated market cost at the end of the term.

    FAR- 77
    AUD -49, 71, 84
    REG -56,75!
    BEC -75

    Massachusetts CPA (non reporting) since 3/12.

    #584919

    ^ is correct. the $420 is just an estimated buyout price at the end, its not the salvage value.

    BEC: 65 - 79* - 84 DONE
    AUD: 65 - 76 DONE
    REG: 63 - 77 DONE
    FAR: 65 - 63 - 67 - 69 - 73 - 71 - 83 DONE

    Becker Notes & Flashcards, Wiley Test Bank, Ninja MCQ

    #584920
    Gatorbates
    Participant

    420k is not salvage value … it's market value. Distractor info. 100% irrelevant in this question.

    Licensed Florida CPA:
    B: 71, 73, 79
    A: 83
    R: 78 (expired), 77
    F: 74, 74, 80

    It's finally freaking over.

    #584921
    krokofilen
    Member

    mla1169 – got it, makes sense, but was a tricky one this.

    Gatorbates: Yeah, agree. It would make sense though if it was not a bulding, but something that the lessee could move and was allowed to keep by the end of the leasing contract.

    Big 4 Audit Manager from Europe here to pass the CPA in the U.S. of A in 2014! Niiice!

    AUD - 95 / Jul 15 / 130h over 4 weeks
    FAR - 86 / Aug 14 / 240h over 4 weeks
    (11 week break)

    REG - 81 / Nov 14 / 200h over 4 weeks
    BEC - 87 / Nov 17 / 30 h over 2.5 days

    #584922
    Gatorbates
    Participant

    True … but then the depreciation would be taken over the life of the asset, which I assume would be shorter than 21 years (since it wasn't a building) … all it would do would cause a large gain at time of sale.

    Licensed Florida CPA:
    B: 71, 73, 79
    A: 83
    R: 78 (expired), 77
    F: 74, 74, 80

    It's finally freaking over.

    #3326287
    FAR Study Group MCQ\’s
    Guest

    FYI→ Given information:
    A- January 1, Yr.1 → acquired (or got) a land lease for 21 -Yrs. No option of renewal. It’s for construction to build a building.
    B- January 1, Yr. 2 → the building completed for a cost of $840,000 and will use the straight line to depreciate.
    C- At the end of 21-Yrs which is the end of the lease the building estimated market value will be $420,000
    Questions => What is the building’s carrying amount December 31, Yr. 2 Balance sheet.
    Step# 1→ First, we take the cost amount which is $840,000 and since the depreciation does NOT start on the first same year so we take the depreciation starting Yr.2. => 21 (original year 21 – 1 = 20 yrs).
    => 840,000 / 20 (dep yrs) = 42,000 => (the depreciation amount every year for the 20-yrs depreciation amount) .
    Question => Then what is the Carrying amount in Dec 31, Yr. 2 in the balance sheet:
    840,000 (cost of the building) – 42,000 (depreciation amount) = 798,000 => (Carrying amount for Dec 31, Yr. 2).

    NOTE ⇒ The market Value which is for $420,000 is a distractor information !!

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