D is corrent. The cost of the leasehold improvements ($540,000) should be amortized over the remaining life of the lease, or over the useful life of the improvements, whichever is shorter. The remaining life of the lease should include periods covered by a renewal option if it is probable that the option will be exercised. In this case, the remaining life of the lease is 18 years (12 years of original lease + 8 years in option period – 2 years past), and the useful life of the improvements is 15 years. Therefore, amortization is based on a 15-year life ($540,000 ÷ 15 = $36,000). The 12/31/Y3 carrying amount is $504,000 ($540,000 – $6,000).
A is incorrect. The cost of the leasehold improvements ($540,000) should be amortized over the remaining life of the lease, or over the useful life of the improvements, whichever is shorter. The remaining life of the lease should include periods covered by a renewal option if it is probable that the option will be exercised. In this case, the remaining life of the lease is 18 years (12 years of original lease + 8 years in option period – 2 years past), and the useful life of the improvements is 15 years. Therefore, amortization is based on a 15-year life ($540,000 ÷ 15 = $36,000). The 12/31/Y3 carrying amount is $504,000 ($540,000 – $6,000).
A is incorrect. The cost of the leasehold improvements ($540,000) should be amortized over the remaining life of the lease, or over the useful life of the improvements, whichever is shorter. The remaining life of the lease should include periods covered by a renewal option if it is probable that the option will be exercised. In this case, the remaining life of the lease is 18 years (12 years of original lease + 8 years in option period – 2 years past), and the useful life of the improvements is 15 years. Therefore, amortization is based on a 15-year life ($540,000 ÷ 15 = $36,000). The 12/31/Y3 carrying amount is $504,000 ($540,000 – $6,000).
A is incorrect. The cost of the leasehold improvements ($540,000) should be amortized over the remaining life of the lease, or over the useful life of the improvements, whichever is shorter. The remaining life of the lease should include periods covered by a renewal option if it is probable that the option will be exercised. In this case, the remaining life of the lease is 18 years (12 years of original lease + 8 years in option period – 2 years past), and the useful life of the improvements is 15 years. Therefore, amortization is based on a 15-year life ($540,000 ÷ 15 = $36,000). The 12/31/Y3 carrying amount is $504,000 ($540,000 – $6,000).
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