Skip to main content
Pearson+ LogoPearson+ Logo
Start typing, then use the up and down arrows to select an option from the list.

Initial Cost of Land (and Leasehold) Improvements

Brian Krogol
Was this helpful?
All right, let's move on to land improvements here. So remember there's the land itself, the acreage, right? The land. And then the land improvements things we build on the land, such as driveways, parking lots, fences, sprinklers, right? Things that we add to the land. These are improvements to the land. Well, these different from the land. These are going to have limited lives, right? So these are these aren't gonna last forever. Like land does these have limited lives? So just like any other asset, the cost of the land improvement will be debited to an asset account. In this case, the land improvements account. So this is an asset as well. Alright? Now, sometimes if if we don't own something straight out, we might lease something like when you lease a car. Well, you don't own the car, right? You're leasing it from the owner for a certain amount of years. Well, you could lease something and you could improve to it. You could have leasehold improvements just like we have land improvements. Well, let's say you didn't own the land and you you were leasing it from its owner, but you had in the contract the ability to put sprinklers to put up fences, right? Those belong to you. They don't belong to the owner. So they would still be part of your assets. So, another example here, you could lease a truck, maybe like Fedex leases a truck and they paint their logo on it, right? That that paint that logo that they painted on it. Well, that's their asset, right? And it's going to depreciate um just like any other depreciate ble asset. So the truck itself, they're not gonna depreciate but they own the improvement right now. The difference here is when we have a land improvement, right? And with most assets we are going to depreciate them over their useful life. Well, at least hold improvement. It's only gonna be over the term of the lease. Okay. And this isn't so such a big deal in your class, you're probably not gonna run into it too much, but we'll do an example of it just in case land improvements and leasehold improvements, they're pretty much the same thing here. Just remember that land improvements. This is gonna be something like you own the land and then this fence, let's say you build a fence on it and it's gonna have a useful life of 20 years. Right? So you would depreciate it over those 20 years where a leasehold improvement, maybe you don't have a you build a fence that's gonna last 20 years but you're only gonna have the lease for say five years. Well you would do it over the term of the lease, not over the whole useful life because you're only gonna have it for those five years. Alright, so that's a little tricky thing that can come up with these land improvements. Is this specific category, leasehold improvements when you're leasing something. But for the most part, I'd say focus on the land improvements and that's just like any other of our fixed assets. We're going to see that we're just appreciating over their useful life. Okay So remember land improvements they are depreciated. Okay land is the only one that is not depreciated and like I said over their useful life. Cool so let's go ahead and do this example here. Let's continue with our S. T. L. C. So they entered into an agreement to lease an office building for the next 10 years. So notice we're dealing with a lease here right? They entered an agreement to lease an office building for the next 10 years. So it's a 10 year lease. And as part of the agreement S. T. L. C. Was allowed to build walls inside of the building to separate the office space. S. T. L. C. paid $20,000 to build the walls. 20,000 to build the walls inside the office building. The walls are expected to last 20 years. The journal entry to record this transaction would include a debit to land buildings, leasehold improvements or a debit to an expense. So notice we built walls for $20,000 right? But we don't own the building. Um So it's not gonna be our building that we're gonna be debating to the building and it's not land either right? We're not gonna be debating it to land. So the trick here is that this is a leasehold improvement right? It's still an asset. We own these walls. So we're gonna have at least hold improvement. And that's gonna be the debit in this transaction. All right. So, we're not gonna expense them right away. We're gonna have this asset and we're gonna depreciate them over their useful life. So when we depreciate it, that's when it's gonna be expensed and show up on the income statement. But we started off when we initially by it, the cost of it is going to this asset leasehold improvements for 20,000 and cash is our credit. We paid for it with cash For 20,000 notice. In this case, we didn't have any extra necessary expenditures, right? They didn't mention anything about taxes or anything necessary to get into use. So, that's it. We didn't have any extra costs going on here. We just got the 20,000. All right. So, this would be the journal entry to uh to signify that we built these walls here for the 20,000. So, the answer here would be c a debit to leasehold improvements. And remember that's an asset account? A long term asset. Cool. So let's check out this other question related to the leasehold improvements. The value of the vault. The value of the walls will be depreciated over 10 years, 15 years, 20 years or not depreciated. They are gonna be depreciated, right? Because they are a long term asset and they're not land land is the only one that's not depreciated. So it's definitely not that. Now this one's a little special case because we're talking about a lease right? Generally we would use the useful life and they told us the walls are expected to last 20 years. That's the useful life right there. Right. The useful life. So if we had owned this building, well, we would depreciate it over the 20 years, but we only leased it for 10 years. This is the term of the lease. So since this is a leasehold improvement, we can only depreciate it as long as we're gonna be leasing that building. So that's the little trick here, is with the leasehold improvement, it would be 10 years If we own this building and built these walls well then we would use the 20 year useful life. Okay. So that's a little bit of a trick there In the end. Since it's at least hold improvement in this case, the answer is gonna be 10 years. It would never be 15 years. We're never going to average out the two. It's always gonna be one or the other there. Okay. So the answer there is 10 years and you can see nothing too crazy there with the the land improvements. We're gonna be treating them just just as we go on to do buildings and we go on to do machinery. You're gonna see that we're gonna be treating them very much the same. The useful life is what's important and the cost is always going to be all those necessary expenditures to get them ready for use. Alright, let's go ahead and move on to the next video.