On 1 April 20W9 Kroner began to lease an office block on a 20-year lease. The useful economic life of the office buildings was estimated at 40 years on 1 April 20W9. The supply of leasehold properties exceeded the demand on 1 April 2009 so as an incentive the lessor paid Kroner $1 million on 1 April 20W9 and allowed Kroner a rent-free period for the first two years of the lease, followed by 36 payments of $250,000, the first being due on 1 April 20X1.
Between 1 April 20W9 and 30 September 20W9 Kroner carried out alterations to the office block at a total cost of $3 million. The terms of the lease require Kroner to vacate the office block on 31 March 20Y9 and leave it in exactly the same condition as it was at the start of the lease. The directors of Kroner have consistently estimated that the cost of restoring the office block to its original condition on 31 March 20Y9 will be $2.5 million at 31 March 20Y9 prices.
An appropriately risk-adjusted discount rate for use in any discounting calculations is 6% per annum.
The present value of $1 payable in 19 1 / 2 years at an annual discount rate of 6% is 32 cents.
Required:
Prepare extracts from the financial statements of Kroner that show the depreciation of leasehold improvements and unwinding of discount on the restoration liability in the statement of comprehensive income for both of the years ended 31 March 20X0 and 20X1.