Construction Costs in Leased Warehouse

What is the appropriate treatment for costs incurred to construct office space in a leased warehouse?

Should the costs be expensed immediately or capitalized as an asset?

Answer:

The costs incurred to construct office space in a leased warehouse should be capitalized as an asset by the lessee.

When a lessee incurs costs to construct office space in a leased warehouse, it should be capitalized as an asset rather than expensed immediately. This is because the constructed office space is expected to provide benefits to the lessee over a certain period of time.

By capitalizing the construction costs, the lessee recognizes the office space as an asset on its balance sheet. The costs are then spread out over the useful life of the office space, matching the cost recognition with the period of benefit received.

Capitalizing the costs also aligns with the matching principle in accounting, where expenses should be recognized in the same period as the revenues they help generate.

Overall, by capitalizing the costs to construct office space in a leased warehouse, the lessee ensures a more accurate reflection of the asset's value and the benefits it will provide over time.