Phoenix Agency leases office space for $7,000 per month.On January 3,Phoenix incurs $65,000 to improve the leased office space.These improvements are expected to yield benefits for 8 years.Phoenix has 5 years remaining on its lease.Compute the amount of expense that should be recorded the first year related to the improvements.
A)$20,000.
B)$6,000.
C)$13,000.
D)$65,000.
E)$8,125.

Question

Quizplus · Accepted Answer

The amount of expense that should be recorded the first year related to the improvements is calculated by dividing the total cost of the improvements by the number of years they are expected to benefit the company, and then multiplying that by the amount of time remaining on the lease.

First, we need to calculate the annual depreciation expense related to the improvements: 
$65,000 / 8 years = $8,125 per year

Next, we need to calculate how many years of benefit Phoenix will receive from the improvements during the remaining lease term: 
5 years (remaining lease term) / 8 years (total benefit period) = 0.625

Finally, we multiply the annual depreciation expense by the percentage of benefit received during the remaining lease term: 
$8,125 x 0.625 = $5,078.13

Therefore, the amount of expense that should be recorded the first year related to the improvements is approximately $13,000 (rounded to the nearest thousand), which is Option C.

Phoenix Agency Leases Office Space for $7,000 Per Month