# Leasehold improvement – depreciable amount

• This topic has 7 replies, 5 voices, and was last updated 1 year, 3 months ago by FAR Study Group MCQ\’s.
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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

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

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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.

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.

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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