Refer to the following lease amortization schedule. The 10 payments are made annually starting with the beginning of the lease. Title does not transfer to the lessee and there is no purchase option or guaranteed residual value. The asset has an expected economic life of 12 years. The lease is noncancelable.

-Like other assets, the cost of a leasehold improvement is allocated as depreciation expense over its useful life to the lessee, which will be:
A) The shorter of the physical life of the asset or the lease term.
B) The physical life of the asset.
C) The lease term.
D) A time period determined by management.

Question

Refer to the following lease amortization schedule. The 10 payments are made annually starting with the beginning of the lease. Title does not transfer to the lessee and there is no purchase option or guaranteed residual value. The asset has an expected economic life of 12 years. The lease is noncancelable.
 
-Like other assets, the cost of a leasehold improvement is allocated as depreciation expense over its useful life to the lessee, which will be:
A) The shorter of the physical life of the asset or the lease term. 
B) The physical life of the asset. 
C) The lease term. 
D) A time period determined by management.

Quizplus · Accepted Answer

Leasehold improvements are improvements made to a leased property by the lessee, and typically revert to the lessor at the end of the lease term. As such, the lessee should allocate the cost of the improvement over the shorter of the physical life of the asset (i.e. the improvement) or the remaining lease term. This is because the lessee will not use the improvement beyond the lease term, and the lessor will typically not compensate the lessee for any remaining value of the improvement at the end of the lease. Therefore, option A is the correct choice.

Refer to the Following Lease Amortization Schedule