302554 Flashcards
Fountain Co. is constructing an office building for its own use. Fountain started the two-year construction project on April 1, year 1, at which point the interest capitalization period began. Fountain made the following payments in year 1 related to the construction of the building:
April 1 Payment to architect for building plans $ 30,000
July 1 Progress payment to contractor 60,000
October 1 Progress payment to contractor 150,000
For the purpose of capitalizing interest, what are Fountain’s weighted-average accumulated expenditures for the year ended December 31, year 1?
$240,000
$80,000
$90,000
$105,000
$90,000
If specified conditions are met, interest is capitalized for assets that are constructed or otherwise produced for an enterprise’s own use. The amount of interest to be capitalized is determined by applying the appropriate capitalization rate to the average amount of the average accumulated expenditures (AAE) for the asset during that period, which weights expenditures for the percentage of the year the enterprise utilized the payments for the assets’ construction. The accumulated expenditures are computed as follows:
Date of Months
Expenditure Amount Outstanding AAE
04/01 $ 30,000 9/12 $ 22,500
07/01 60,000 6/12 30,000
10/01 150,000 3/12 37,500
Total AAEs $ 90,000
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Capitalization of Interest
Capitalization of interest is to record the cost of interest (as well as other time-related costs, such as taxes and insurance) paid to finance a long-term construction project (whether self-constructed or acquired from others and whether for self-use or for resale) as an asset and defer its recognition as an expense to future periods. It is not to exceed the total interest incurred during that period.
FASB ASC 835-20
Conceptually, the amount of interest to be capitalized is the interest that could have been avoided if the expenditures for the asset had not been made. It requires determination of average accumulated expenditures during each interim capitalization period and the capitalization rate (usually the purchaser’s incremental borrowing rate or a weighted-average interest rate).
2243.01
If specified conditions are met, interest shall be capitalized for the following qualifying assets:
a. Assets that are constructed or otherwise produced for an enterprise’s own use (including assets constructed or produced for the enterprise by others for which deposits or progress payments have been made)
b. Assets intended for sale or lease that are constructed or otherwise produced as discrete projects (e.g., ships or real estate developments)
c. Investments (equity, loans, and advances) accounted for by the equity method while the investee has activities in progress necessary to commence its planned principal operations, provided that the investee’s activities include the use of the funds to acquire qualifying assets for its own operations
2243.02
Interest cost specifically shall not be capitalized for the following:
a. Assets that are in use or ready for their intended use in the earning activities of the entity
b. Assets that are not being used in the earning activities of the entity and that are not undergoing the activities necessary to get them ready for use
c. Assets that are not included in the consolidated balance sheet of the parent entity and consolidated subsidiaries
d. Investments accounted for by the equity method after the planned principal operations of the investee begin (i.e., after the investee no longer qualifies as a development stage enterprise)
e. Investments in regulated investees that are capitalizing both the cost of the debt and equity capital
f. Assets acquired with gifts and grants that are restricted by the donor or grantor to acquisition of those assets to the extent that funds are available from such gifts and grants. Interest earned from temporary investment of those funds that is similarly restricted shall be considered an addition to the gift or grant for this purpose.
g. Inventories that are routinely manufactured or otherwise
2243.03
For qualifying assets, the interest cost incurred during the period of time required to carry out activities necessary to bring the asset to the condition and location necessary for its intended use is a part of the historical cost of acquiring the asset. The amount of interest to be capitalized during a given accounting period is determined by applying the appropriate capitalization rate to the average amount of accumulated expenditures for the asset during that period. Expenditures for this purpose are capitalized expenditures for the qualifying asset that have required the payment of cash, the transfer of other assets, or the incurring of a liability on which interest is recognized.
2243.11
The average accumulated expenditures (AAE) for 20X1 is calculated as follows:
Date of Weighting
Expenditure Amount Factor AAE
04/01/X1 $ 500,000 9/12 $ 375,000
06/01/X1 1,500,000 7/12 875,000
$1,250,000
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