INCOME on INCOME on

Leasehold Improvements Leasehold Improvements

ANGELITO C. DESCALZO, CPA ANGELITO C. DESCALZO, CPA
ICAEW IFRS Certified ICAEW IFRS Certified
Leasehold Improvements Leasehold Improvements -- Definition Definition
Alterations made to rental premises in order to
customize it for the specific needs of a tenant.
Leasehold improvements include construction of
building, fencing, painting, installing partitions,
changing the flooring, putting in customized light
fixtures, etc.
Leasehold improvements can either be undertaken by
landlords (lessors), who may offer to do so to increase
the marketability of their rental units, or by the tenants
(lessees) themselves.
Alterations made to rental premises in order to
customize it for the specific needs of a tenant.
Leasehold improvements include construction of
building, fencing, painting, installing partitions,
changing the flooring, putting in customized light
fixtures, etc.
Leasehold improvements can either be undertaken by
landlords (lessors), who may offer to do so to increase
the marketability of their rental units, or by the tenants
(lessees) themselves.
When the lessee makes useful improvement to the leased
property, the following rules shall apply if no reimbursements
are made by the lessor:
1. The lessor may report income under the:
a. Outright method based on fair market
value (FMV) of improvements in the year of
completion
b. Spread-out method book value (BV) of
improvements are spread over the remaining
term of the lease
1. The lessor may report income under the:
a. Outright method based on fair market
value (FMV) of improvements in the year of
completion
b. Spread-out method book value (BV) of
improvements are spread over the remaining
term of the lease
Rules on Leasehold Improvement (continued):
2. Lessee may claim depreciation of the
improvements over the remaining term of the lease
or life of the improvements, whichever is shorter.
3. If there is a premature termination of lease, the
lessor should report income based on the BV upon
termination less amount already reported as
income.
4. The lessor shall apply cash method on
prepayment of rental even if it is using accrual
accounting.
2. Lessee may claim depreciation of the
improvements over the remaining term of the lease
or life of the improvements, whichever is shorter.
3. If there is a premature termination of lease, the
lessor should report income based on the BV upon
termination less amount already reported as
income.
4. The lessor shall apply cash method on
prepayment of rental even if it is using accrual
accounting.
Leasehold Improvements Leasehold Improvements
Note:
If leased property (land and building) is being used
actually, directly and exclusive for educational
purpose, the lessee shall be exempt from paying real
estate tax.
All assessments or reassessments made after the 1
st
day of January of any year shall take effect on the 1
st
day of January of the succeeding year (Sec. 221, Local
Government Code of 1991).
Note:
If leased property (land and building) is being used
actually, directly and exclusive for educational
purpose, the lessee shall be exempt from paying real
estate tax.
All assessments or reassessments made after the 1
st
day of January of any year shall take effect on the 1
st
day of January of the succeeding year (Sec. 221, Local
Government Code of 1991).
Illustration Illustration Leasehold Improvement Leasehold Improvement
Mr. A leased a land to Mr. B for a period of 20 years starting
January 2, 2012 at a monthly rental of P50,000.
The Lease contract provides that Mr. B will construct a school
house on the lot.
The contract also provides that the improvement shall become
property of the lessor at the end of the lease.
The school house was completed on June 30, 2014 at a cost of
2,000,000.
The estimated life of the leasehold improvement is 25 years.
Mr. B agreed to pay the real estate tax on the land assessed at
P34,567 annually.
Mr. B paid Mr. A an equivalent of 2 years rent on January 3,
2012.
Mr. A leased a land to Mr. B for a period of 20 years starting
January 2, 2012 at a monthly rental of P50,000.
The Lease contract provides that Mr. B will construct a school
house on the lot.
The contract also provides that the improvement shall become
property of the lessor at the end of the lease.
The school house was completed on June 30, 2014 at a cost of
2,000,000.
The estimated life of the leasehold improvement is 25 years.
Mr. B agreed to pay the real estate tax on the land assessed at
P34,567 annually.
Mr. B paid Mr. A an equivalent of 2 years rent on January 3,
2012.
Q1 Q1 What is the income to be reported by What is the income to be reported by
the lessor in 2012? the lessor in 2012?
Cash received (P50,000 x 24) 1,200,000
Tax paid by lessee 34,567 Tax paid by lessee 34,567
Income to be reported in 2012 1,234,567
Q2 Q2 What is the income to be reported by What is the income to be reported by
the lessor in 2013? the lessor in 2013?
Tax paid by lessee 34,567
Income to be reported in 2013 34,567 Income to be reported in 2013 34,567
Q3 Q3 What is the income to be reported by What is the income to be reported by
the lessor in 2014 under the outright the lessor in 2014 under the outright
method? method?
Rent income (50,000 x 12) 600,000
Leasehold improvement 2,000,000 Leasehold improvement 2,000,000
Tax paid by lessee 34,567
Income to be reported in 2014
under outright method 2,634,567
Q4 Q4 What is the income to be reported by What is the income to be reported by
the lessor in 2014 under the spread the lessor in 2014 under the spread--out out
method? method?
Rent income (P50,000 x 12) 600,000
Tax paid by lessee 34,567
Income on Leasehold improvement: Income on Leasehold improvement:
Cost 2,000,000
Less: Accumulated amortization
(2,000,000/25 x 17.5) 1,400,000
Book value, end of lease 600,000
Computation: (600,000/17.5) x 6/12 17,143
Income to be reported in 2014
under spread-out method 651,710
Q5 Q5 What is the income to be reported by What is the income to be reported by
the lessor in 2015 under the spread the lessor in 2015 under the spread--out out
method? method?
Rent income (P50,000 x 12) 600,000
Income on Leasehold improvement:
Cost 2,000,000 Cost 2,000,000
Less: Accumulated amortization
(2,000,000/25 x 17.5) 1,400,000
Book value, end of lease 600,000
Computation: (600,000/17.5) 34,286
Income to be reported in 2015
under spread-out method 634,286
Q6 Q6 Assuming the lease contract was terminated on Assuming the lease contract was terminated on
March 31, 2018 due to lessees fault, how much income March 31, 2018 due to lessees fault, how much income
should Mr. A report in 2018 under the spread should Mr. A report in 2018 under the spread--out method? out method?
Cash received (50,000 x 3) 150,000
Leasehold improvement:
Cost 2,000,000
Less: Accumulated depreciation Less: Accumulated depreciation
(2,000,000/25 x 3.75) 300,000
Book value upon termination 1,700,000
Less: Amount declared as income
2014 17,143
2015 34,286
2016 34,286
2017 34,286 120,001 1,579,999
Income to be reported in 2018 1,729,999
Q7 Q7 How much deductible expenses can How much deductible expenses can
the lessee report in 2014? the lessee report in 2014?
Rent expense (P50,000 x 12)
Tax
600,000
34,567
Depreciation on LHI
2,000,000/17.5 x 6/12 57,143
Depreciation on LHI
2,000,000/17.5 x 6/12 57,143
Expenses to be reported in 2014 691,710
Q8 Q8 How much deductible expenses can How much deductible expenses can
the lessee report in 2015? the lessee report in 2015?
Rent expense (P50,000 x 12) 600,000
Depreciation on LHI
2,000,000/17.5 114,286 2,000,000/17.5 114,286
Expenses to be reported in 2015 714,286
Q9 Q9 How much deductible expenses can How much deductible expenses can
the lessee report in 2018? the lessee report in 2018?
Rent expense (P50,000 x 3) 150,000
Depreciation on LHI
2,000,000/17.5 X 3/12 28,571 2,000,000/17.5 X 3/12 28,571
Expenses to be reported in 2018 178,571
Note: Remaining book value of leasehold improvement
shall be treated as other loss by the lessee
GROSS INCOME from
Manufacturing, Merchandising or
Mining business
Computation of Gross income:
Total sales Pxxx
Less: Cost of Goods Sold xx
Gross Profit Pxxx
Add: Other Income xx
Gross Income Pxxx
Computation of Gross income:
Total sales Pxxx
Less: Cost of Goods Sold xx
Gross Profit Pxxx
Add: Other Income xx
Gross Income Pxxx
GROSS INCOME from Farming
Farm includes livestock, dairy, poultry, fruit and truck
farms, plantations, ranches, and all land used for
farming operations.
Methods of reporting gross income:
a. Cash basis no inventory is used to determine
profits
b. Accrual basis an inventory account is used to
determine profits
c. Crop basis used when crops take more a year
to gather and dispose of from the time of planting.
Farm includes livestock, dairy, poultry, fruit and truck
farms, plantations, ranches, and all land used for
farming operations.
Methods of reporting gross income:
a. Cash basis no inventory is used to determine
profits
b. Accrual basis an inventory account is used to
determine profits
c. Crop basis used when crops take more a year
to gather and dispose of from the time of planting.