Journal entry for disposal of leasehold improvement

Introduction

Sometimes, we may need to dispose of the leasehold improvement that we have capitalized on the balance sheet as a fixed asset. In this case, we need to make the journal entry for disposal of leasehold improvement in order to remove it from the balance sheet as well as to recognize any loss (if any) to the income statement as an expense for the period.

The leasehold improvement is the amount that we, as tenants, have paid for the customization or improvement on the leased property. In accounting, leasehold improvement can be capitalized as a fixed asset and amortized for the remaining period of the lease contract or for the useful life of the improvement if it is shorter than the lease contract.

Likewise, when we make the disposal of leasehold improvement, it may already be fully amortized. In this case, there is no loss to record in the income statement.

On the other hand, if we make the disposal of leasehold improvement before it is fully amortized, there will be a loss that needs to be recorded as an expense in the income statement immediately. This usually happens when we end the lease contract before its maturity.

Journal entry for disposal of leasehold improvement

Disposal of leasehold improvement – fully amortized

We can make the journal entry for disposal of leasehold improvement that has been fully amortized by debiting the accumulated amortization account and crediting the leasehold improvement account.

As the leasehold improvement have been fully amortized, there is no loss as a result of the disposal in this journal entry. Likewise, this journal entry simply removes the leasehold improvement that has a zero net book value from the balance sheet.

Disposal of leasehold improvement – not fully amortized

Sometimes, we may need to dispose of the leasehold improvement even it is not fully amortized yet. This may happen when we decide to stop renting the property and terminate the lease contract before its maturity.

In this case, there will be a loss that we need to record as an expense in the income statement as a result of the disposal of leasehold improvement that is not fully amortized. The amount of the loss, in this case, is the remaining balance of the unamortized leasehold improvement.

Likewise, we can make the journal entry for disposal of leasehold improvement that is not fully amortized with the debit of the accumulated amortization account and the loss on disposal of fixed assets account and the credit of the leasehold improvement account.

In this journal entry, the loss on disposal of fixed assets is the remaining unamortized balance of the leasehold improvement that we have not charged to the income statement as an amortization expense yet. Likewise, we need to charge this amount to the income statement as an expense when we make the disposal of leasehold improvement.

Example for disposal of leasehold improvement

For example, on December 31, we decide to dispose of $5,000 of leasehold improvement as we move our office to a new and bigger office building from the current leasehold building that we have rented from the landlord.

However, the $5,000 leasehold improvement has not been fully amortized yet in which there is a $1,000 unamortized balance remaining. This is because the lease contract is for 5 years but we have only used the office building for 4 years.

In this case, we can make the journal entry for the disposal of the $5,000 leasehold improvement that is not fully amortized by recording the unamortized balance of $1,000 to the loss on disposal of fixed assets account as below:

In this journal entry, the total assets on the balance sheet will decrease by $1,000 while total expenses on the income statement will increase by the same amount of $1,000 as a result of the disposal of the $5,000 leasehold improvement on December 31.