Leasehold improvements are investments made to leased commercial property, such as office space or retail storefronts, which depreciate over time. Notably, upon termination or expiration of a lease, these improvements are forfeited to the landlord since they have become part of the real property itself. Thus, the loss of value that occurs at the end of a lease as a result of the tenant company no longer being able to benefit from its leasehold improvements is the subject of a particular journal entry.
Write off leasehold improvements from the balance sheet. Upon termination or non-renewal of a lease, the tenant essentially abandons the various leasehold improvements made to the rental property. Accordingly, since the company no longer owns, controls or can benefit from these assets, it should remove them from its balance sheet.
Perform a reversing entry for accumulated depreciation. Over the lease term, leasehold improvements are depreciated like any other physical asset. However, since at the end of the lease the company no longer carries the leasehold improvement on its books, it should no longer carry the related accumulated depreciation on its books either. Thus, the accumulated depreciation on leasehold improvements should be reversed.
Determine the market value of leasehold improvements. Occasionally, the landlord will credit the tenant for leasehold improvements, since they may be of use to future tenants. Otherwise, leasehold improvements may be removed and sold to third parties. Regardless, management should determine the fair value of the leasehold improvements at the end of the lease.
Record a loss on the abandonment of leasehold improvements. Management will likely have to record a loss on the abandonment of leasehold improvements if their fair value at lease end is less than the difference between their original cost and accumulated depreciation. For example, if leasehold improvements cost $20,000 with accumulated depreciation of $15,000, if the landlord offered a $500 credit to the outgoing tenant, then there would be a $4,500 loss recorded on the abandonment of leasehold improvements.